System and method for creating and trading packaged collar options on an exchange

• US 7,562,046 B2
• Filed: 05/04/2005
• Issued: 07/14/2009
• Est. Priority Date: 05/04/2005
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: O'Callahan, Dennis M.
• Primary Examiner(s): PATEL, JAGDISH
• Application Number:
  US11/122,511
• Publication Number:
  US 20060253354A1
• Time in Patent Office: 1,532 Days
• Field of Search: 705/37, 705/35
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A method of creating and trading packaged standard option collars on an exchange is provided, as well as a trading facility for trading such packaged standard option collars. Collars are created by identifying an underlying asset, a first leg of a collar is determined by determining the desired strike price for the first leg and selecting a standard option contract traded on the exchange having a strike price closest to the desired strike price. The second leg is determined by selecting another standard option, the opposite of the first leg, having an option price substantially offsetting the option price of the first leg. Once the legs of the collar have been selected the collar package may be listed on the exchange, and orders for the collars may be processed by matching orders for opposite positions in the collar.

Claims

1. A method of creating and trading a package of option contracts on an electronic trading system, the method comprising:

identifying an underlying asset at the electronic trading system;

selecting at a collar option package definition module of the electronic trading system one of a call option contract or a put option contract for the underlying asset as a first leg of an option collar;

selecting at the collar option package definition module of the electronic trading system an unselected one of the call option contract or the put option contract for the underlying asset as a second leg of the option collar, wherein the second leg is selected based on a strike price of the first leg;

listing via a pricing data accumulation and dissemination module of the electronic trading system the first and second legs of the option collar as a single packaged instrument on an exchange;

accepting orders from investors to take positions in the packaged instrument;

executing orders at an electronic trading engine in the electronic trading system by matching orders to take opposite positions in the packaged instrument.

2. The method of claim 1 wherein the step of selecting the first leg of an option collar comprises the collar option package definition module calculating a desired strike price by multiplying a current value of the underlying asset by a moneyness factor and selecting a standard option contract listed on the exchange having a strike price closest to the desired strike price.

3. The method of claim 2 wherein the moneyness factor is determined based on a desired spread between the current value of the underlying asset and the strike price of the first leg of the collar.

4. The method of claim 3 wherein the first leg of the collar is a call option and wherein the moneyness factor is calculated by adding the desired spread ratio between the strike price of the first leg of the collar and the current value of the underlying asset to one.

5. The method of claim 3 wherein the first leg of the collar is a put option and wherein the moneyness factor is calculated by subtracting the desired spread ratio between the strike price of the first leg of the collar and the current value of the underlying asset from one.

6. The method of claim 2 wherein the option contract selected as the first leg of the option collar has a first leg option price associated therewith, and wherein the step of selecting the second leg of the option collar comprises selecting a standard option contract listed on the exchange having a second leg option price substantially offsetting the first leg option price.

7. The method of claim 1 wherein the step of executing orders comprises executing the first and second legs as independent standard options contracts that may be traded freely on the exchange.

8. The method of claim 1 wherein the step of executing orders comprises executing the first and second legs as an inseparable instrument such that investors may only take positions in, and close positions in, both the first and second legs simultaneously.

9. The method of claim 1 wherein the first and second legs are determined and remain valid for a defined period of time.

10. The method of claim 1 wherein the legs are determined in real time.

11. A system for creating and trading an option collar package of standard option contracts traded on an exchange comprising:

a processor having a collar option package definition module for defining legs of a packaged option collar, wherein the legs of the packaged option collar comprise standard option contracts traded on an exchange, and wherein a second of the legs is defined based on a strike price of a first of the legs;

the processor further having a pricing data accumulation and dissemination module for receiving and disseminating data regarding packaged option collar transactions;

a electronic trading platform in communication with the processor for trading said packaged option collars; and

the processor further having a post trade processing module for tracking individual legs of a packaged option collar after the collar has been executed.