For more, check out Electronic Trading: This form described the terms of the contracts for the bids and or offers that are solicited. No transaction may take place until the Request Response Time has expired. Upon submission, the RFQ is disseminated to market participants, including on-floor market makers, Remote Market Makers trading electronically , and member firm traders.
Creating an Index FLEX Option
These limitations created a ceiling on the total number of options contracts on the same side of the market that an investor or group of investors acting together may hold or write, according to the American Stock Exchange.
FLEX options transactions use to be paper intensive. According to the study, "Reducing the Market Impact of Large Stock Trades" in the Journal of Portfolio Management , the investor began the process by going to a broker or dealer.
The broker contacted the floor of the exchange, such as AMEX. The broker also completed a request for quote form. This form described the terms of the contracts for the bids and or offers that are solicited. Next, the form went to the specialist responsible for options.
This specialist fixed a request response time that occurred within a couple of minutes to twenty minutes for responding quotes. The trade was assigned an alphanumeric number. The proposed trade was put on the Options Price Reporting Authority tape. Off-floor dealers and customers bid or sent offers to their brokers to contact specialist. Once that time ended, the best bid and offer were sent out on the Options Price Reporting Authority.
For more, check out Electronic Trading: The Role Of A Specialist. The demand for options started to dwindle so the process became automated in with CFlex, an online platform.
The virtual environment cut costs and reduced the time for orders and request for quotes. Investopedia Academy has created Options for Beginners , an extensive online course that provides 4 hours of videos and interactive content that will have you ready to hit the trading floor running. Check it out today! Pros Brokers frustrated with the manual process were relieved when the trading of FLEX options became fully automated. It made trading more secure in a real-time environment.
This policy holds for all opening-settled and closing-settled contracts. For all American-style Index FLEX Options, regardless of the method of settlement value determination opening or closing , exercises tendered prior to the expiration date are only against the closing value of the index on the day of the exercise.
Like conventional index options, exercises of FLEX Options result in delivery of cash on the business day following expiration or following the day on which the exercise notice is tendered.
Index FLEX Options are generally subject to the same customer margin rules that apply to conventional listed index options, and are eligible for portfolio margining accounts. Margin offsets are allowed for Index FLEX Options on the same index and with the same index multiplier, but with differing exercise styles American or European , which otherwise meet the standard requirements for offset treatment. Please be aware that pricing patterns may differ between European and American style options.
Under certain circumstances, it is possible that the spread margin held by a carrying broker could become insufficient to cover the assignment obligation on the short option if the customer is unable to exercise the long European-style option and that option is trading at a discount to its intrinsic value. This can also occur between two European-style options with different expirations.
Therefore, the carrying broker-dealer will most likely require higher margin for such spreads. In addition, margin offsets are allowed for Index FLEX Options on the same index and with the same index multiplier but with differing settlement value determinations open or close which otherwise meet the standard requirements for offset treatment. It should also be noted that although Cboe allows margin offsets between Index FLEX Options that use different settlement value determinations, if both options expire on the same day, two days before that expiration day both options must be margined separately because of the possibly significant differences between the final settlement values of the offsetting options.
Index FLEX Options can be offset against conventional options on the same underlying index provided it otherwise meets the requirements for offset treatment.
Under no circumstances can Index FLEX Options on one index be offset with options on any other index for customer margin purposes. The following is a short, non-exhaustive summary of margin treatment for various strategies applying only to broad-based index options:. For questions concerning customer margin treatment or more details concerning the margin required for various trading strategies, please contact Jim Adams in the Cboe Department of Member Firm Regulation at for assistance.
The matters discussed in this section are subject to detailed rules, regulations, and statutory provisions which should be referred to directly for additional detail and are subject to changes that may not be reflected in this material. The following vendors currently display on-line updates of FLEX information. Each terminal currently enabled for options data will display FLEX information.
The format currently provided by vendors is in a news headline format. Matt McFarland mcfarland cboe. Introducing 24 hour trading, 5 days a week with TD Ameritrade. Account Settings Sign Out. FLEX Options provide important features such as: Minimization of counterparty credit risk and contract guarantees provided by The Options Clearing Corporation Customized contract terms, such as expiration style and date Price discovery in a competitive auction market with price transparency The administrative convenience of exchange traded options Daily closing prices which are set independently by The Options Clearing Corporation A secondary market to offset positions Index FLEX options are available on any of the Indexes listed at Cboe, including: Users may specify any of the following terms: The underlying Index e.
Option Type - Call or Put. Expiration Date - Up to 15 years from creation. The expiration date specified must be a business day. Strike Price - May be specified as an index level, as a percentage, a numerical deviation from a closing index level or an intra-day value level, or any other readily understood method for deriving an index level, rounded to the nearest hundredth of an index point e.
If the expiration specified falls on the third Friday of the month or the first preceding business day if the third Friday is a holiday , only European-style exercise is permitted. Settlement Value - Settlement may be based on either the opening settlement value or closing settlement value see "Creating a FLEX Options" section for details.
Exercise assignment will result in the delivery payment of cash on the business day following expiration. Competitive Price Discovery FLEX options have been designed to allow each customer order to be exposed to a competitive auction process for price discovery. Premium Price The premium for the RFQ and the executed trade may be expressed in percentage terms of the reference value of the underlying index.
Premiums are rounded to the nearest hundredth greater than or equal to. Size Size for the RFQ and the executed trade may be expressed in millions of dollars of underlying value of the index.
Cboe rounds the notional principal amount to the nearest whole number of contracts greater than or equal to. The necessary information is then transmitted to OCC for the clearance and settlement process. Size may be represented in number of contracts, e. Opening settlement value Opening settlement value is calculated using the opening price in the primary market for each component security on the specified expiration date of the FLEX Option.
Opening settlement value ticker symbols: Responsive Quotes Market Makers, Trading Permit Holders and Floor Brokers acting on behalf of customers will provide Responsive Quotes that are not bound by affirmative quoting obligations. Responsive Quotes are made verbally in the trading crowd at the end of the Request Response Time. No transaction may take place until the Request Response Time has expired. The Submitting TPH decides whether to accept the best bid or offer.
Upon notification of acceptance of a bid or offer by the Submitting TPH, the FLEX Help Desk will disseminate a last sale message as well as enter the transaction into the trade match system and generate a trade confirmation for the parties involved. There are two exceptions to this: The Submitting TPH has priority over any party wishing to trade the requested option series up to the full notional amount specified in the RFQ subject to the requirements of Section 11 a of the Exchange Act.
If a party other than the Submitting TPH wishes to trade that option series, and none of the above conditions are met, the other party must submit a new RFQ in order to generate Responsive Quotes upon which a transaction may occur. Secondary Trading Quotes are only available upon submission of an RFQ and secondary trading is conducted under the same procedures as series-creating transactions.
The following is a short, non-exhaustive summary of margin treatment for various strategies applying only to broad-based index options: Long Call, Long Put. Cash Account Initial Requirement: Margin Account Initial Requirement: Nine months or less until expiration - pay in Full. Margin Account Maintenance Requirement: Short Call, Short Put.