By Suzanne Cosgrove

An uncertain global economy makes for a challenging trading environment, but that scenario also appears to be fueling additional volume in all options sectors, based on recent fund managers’ comments and study for the TABB Group released in July.

Despite sagging equity volume, options trading is expected to reach a record 4.2 billion contracts in 2011, marking the ninth straight year of volume increases, TABB said.

In an annual report on buy-side trading, the study found traders are turning to technology to support their greater use of listed options. Direct market access and options algorithms are accounting for 66 percent of total buy-side order flow this year, up from 64 percent in 2010, the TAFF report found.

The role of options in trading strategies is evolving, said Andy Nybo, head of derivatives for TABB and the author of the study. He attributed that evolution to new products such as weekly options, expansion of dollar strikes and a greater focus on volatility attracting investors’ attention.

Interestingly, some fund managers who turn to options will not trade other alternative products, such as futures.

For example, Dreyfus Global Real Return Fund portfolio manager Suzanne Hutchins recently told me in an interview that her strategy includes call options on U.S. long bonds, as well as put options on currencies.

The relatively conservative Global Real Return Fund, which has about $8.6 million under management, does not use futures. With an option premium, “we know that is our base loss.” The fund is not interested in the unlimited ups and downs in futures, she said.

The fund’s portfolio currently includes about 62 percent in equity securities, about 18 percent in cash, 3 percent in convertible bonds and 3 percent in commodity exchange-traded funds, Hutchins said.

The fund also has about 16 percent in fixed income, so global inflation concerns and debt problems are key issues to keep under management.

Fund managers and institutions also are keenly aware of the overall volatility of their portfolio – another reason options have become more attractive.

“Volatility has moved into the daily lexicon of most institutional options traders and they are craving systems that provide easy-to-use functionality to support their analytical requirements,” Nybo said.

Options brokerages are responding by investing in staff and technology. “They’re chasing after $3 billion in annual buy-side commission revenues by providing a targeted range of services to some rather demanding clients,” Nybo.

Direct market access and options algorithms are accounting for 66 percent of total buy-side order flow this year, up from 64 percent in 2010, the TAFF report found.

The TABB study was based on interviews with 51 options traders at U.S hedge funds, asset managers and proprietary trading firms that represent a combined total of $2.7 trillion in assets under management.