Method and system for creating and trading derivative investment products based on a statistical property reflecting the variance of an underlying asset

• US 8,326,716 B2
• Filed: 10/10/2006
• Issued: 12/04/2012
• 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.), CTC Trading Group, LLC
• Inventors: Hiatt, John C. Jr., Shalen, Catherine T., Feuser, Daniel, Chern, Eric, Kepes, Paul, Hall, Andrew, Biscamp, Lewis
• Primary Examiner(s): MARCUS, LELAND R
• Application Number:
  US11/545,793
• Publication Number:
  US 20070106583A1
• Time in Patent Office: 2,247 Days
• Field of Search: 705/35
• US Class Current: 705/35
• 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

Abstract

Systems and methods for creating a limited risk derivative based on a realized variance of an underlying equity is disclosed. In one implementation, a limited risk derivative product includes a capped value for a statistical property reflecting a variance of the underlying equity is calculated based on a pari-mutuel action. The capped value includes a dynamic value and a cap. The dynamic value reflects an average volatility of prices returns of the underlying equity over a predefined period of time and the cap reflects a maximum value of the dynamic value. The limited risk derivative product additionally includes an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity.

Claims

1. A system for creating a limited risk derivative product based on a realized variance of an underlying equity, the system comprising:

a variance property module comprising a processor and a memory coupled with the processor, the processor configured to execute logic stored in the memory to create a limited risk derivative product based on a realized variance of an underlying equity, the limited risk derivative comprising a capped value for a statistical property reflecting the variance of the underlying equity and an average of a summation of each squared daily return of the underlying equity included in the capped value for the statistical property reflecting the variance of the underlying equity;

wherein the capped value for the statistical property reflecting the variance of the underlying equity comprises a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period; and

wherein the value of the statistical property reflecting the variance of the underlying equity is calculated according to the formula;

2. The system of claim 1, wherein a squared deviation of a daily return of the underlying equity that corresponds to a market disruption event is removed from the average volatility of price returns of the underlying equity over the predefined time period.

3. The system of claim 1, wherein the underlying equity is selected from the group consisting of:

commodity or structured products traded on a trading facility or over-the-counter market;

equity indexes or securities;

fixed income indexes or securities; and

foreign currency exchange rates;

interest rates;

commodity indexes.

4. The system of claim 1, wherein the capped value is calculated from a parimutuel auction.

5. The system of claim 1, wherein the product is a variance futures product.

6. The system of claim 1, wherein the product is a variance options product.

7. The system of claim 6, wherein variance options product is a limited risk option contract.

8. The system of claim 7, wherein the limited risk option contract comprises a contract payout that is a capped variable amount.

9. The system of claim 7, wherein the limited risk option contract comprises a payout that is a constant amount when the value of the underlying asset is in a specified strike range at expiration and zero when the value of the underlying asset is outside the specified strike range.

10. The system of claim 7, wherein the limited risk option contract comprises a combination of a long call option comprising a contract payout that is a capped variable amount with a short put option comprising a contract payout that is a capped variable amount, both the long call option and the short put option having the same strike prices and option premium prices.

11. The system of claim 1, wherein the limited risk variance derivative product is a chooser limited risk variance derivative product where a buyer of the chooser limited risk variance derivative product may choose after purchase of the chooser limited risk derivative product whether the chooser limited risk derivative is a call options or a put option.

12. A computer-implemented method of calculating and disseminating a value of an underlying asset associated with at least one limited risk variance derivative, the method comprising:

calculating, with a processor, from a plurality of pari-mutuel auctions, a capped value for a statistical property reflecting the variance of the underlying equity, the capped value comprising a value and a cap, the value reflecting an average volatility of price returns of the underlying equity over a predefined time period and the cap reflecting a maximum value of the value reflecting the average volatility of price returns of the underlying equity over the predefined time period;

calculating, with the processor, an average of a summation of each squared daily return of the underlying equity included in the value for the statistical property reflecting the variance of the underlying equity;

wherein the value of the statistical property reflecting the variance of the underlying equity is calculated according to the formula;

13. The method according to claim 12, wherein calculating the value of the statistical property reflecting the variance of the underlying equity comprises:

removing the squared deviation of a daily return of the underlying equity that corresponds to a market disruption event.

14. The method according to claim 12, further comprising:

executing trades for the limited risk variance derivative by matching bids and offers to buy and sell positions in limited risk variance derivatives.

15. The method according to claim 12, wherein the underlying equity is selected from the group consisting of:

commodity or structured products traded on a trading facility or over-the-counter market;

equity indexes or securities;

fixed income indexes or securities;

foreign currency exchange rates; and

interest rates;

commodity indexes.

16. The method according to claim 12, wherein at least one of the at least one limited risk variance derivative is a limited risk option contract.

17. The method according to claim 12, wherein at least one of the at least one limited risk variance derivative is a limited risk futures contract.

18. The method according to claim 12, wherein the trading platform is an open outcry platform.

19. The method according to claim 12, wherein the trading platform is an electronic platform.

20. The method according to claim 12, wherein the trading platform is a hybrid of an open outcry platform and an electronic platform.

21. The method according to claim 12, further comprising:

transmitting the at least one limited risk variance derivative quote from the trading facility over at least one dissemination network.

22. The method according to claim 21, wherein the dissemination network is the Options Price Reporting Authority.

23. The method according to claim 12, wherein the trading facility is an exchange.

24. The method according to claim 12, wherein the liquidity provider is selected from the group consisting of:

Designated Primary Market Makers (“

DPM”

), market makers, locals, specialists, trading privilege holders, members, and a registered trader.

25. The method according to claim 12, wherein the market participant is selected from the group consisting of:

a liquidity provider, a brokerage firm, and an investor.

26. The method of claim 12, wherein the limited risk variance derivative is a chooser limited risk variance derivative where a buyer of the chooser limited risk variance derivative may choose after purchase of the chooser limited risk derivative whether the chooser limited risk derivative is a call options or a put option.