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

• US 8,386,374 B2
• Filed: 02/17/2012
• Issued: 02/26/2013
• 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:
  US13/399,217
• Publication Number:
  US 20120265665A1
• Time in Patent Office: 375 Days
• Field of Search: 705/35, 705/37
• 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. An exchange for creating and trading a package of option contracts, the exchange comprising:

an exchange backend system, the exchange backend system comprising a processor configured to;

identify an underlying asset for which standard options contracts are traded on the exchange at the electronic trading platform;

select one of a call option contract or a put option contract for the underlying asset as a first leg of an option collar;

select 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; and

list the first and second legs of the option collar as a single packaged instrument on the exchange;

and

an electronic trading platform in communication with the exchange backend system, the electronic trading platform configured to;

accept orders from investors to take positions in the packaged instrument; and

execute orders by matching orders to take opposite positions in the packaged instrument.

2. The exchange of claim 1, wherein to select the first leg of the option collar the processor is configured to calculate a desired strike price by multiplying a current value of the underlying asset by a moneyness factor and to select a standard option contract listed on the exchange having a strike price closest to the desired strike price.

3. The exchange of claim 2, wherein the processor is configured to determine the moneyness factor based on a desired spread ratio between the current value of the underlying asset and a strike price of the first leg of the option collar.

4. The exchange of claim 3, wherein the first leg of the option collar is a call option and wherein to calculate the moneyness factor the processor is configured to add the desired spread ratio between the strike price of the first leg of the option collar and the current value of the underlying asset to one.

5. The exchange of claim 3, wherein the first leg of the option collar is a put option and wherein to calculate the moneyness factor the processor is configured to subtract the desired spread ratio between the strike price of the first leg of the option collar and the current value of the underlying asset from one.

6. The exchange 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 processor is further configured to select as the second leg a standard option contract listed on the exchange having a second leg option price substantially offsetting the first leg option price.

7. The exchange of claim 1, wherein the electronic trading platform is configured to execute the first and second legs as independent standard options contracts that may be traded freely on the exchange.

8. The exchange of claim 1, wherein the electronic trading platform is configured to execute 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 exchange of claim 1, wherein the processor is configured to select and maintain as valid the first and second legs for a defined period of time.

10. The exchange of claim 1, wherein the processor is configured to select the first and second legs in real time.

11. An exchange for creating and trading a package of option contracts, the exchange comprising:

an electronic trading platform configured to receive and execute orders; and

an exchange backend system, the exchange backend system comprising a processor configured to;

identify one of an out-of-the-money standard call option or an out-of-the-money standard put option at the exchange, the one of the out-of-the-money standard call option or the out-of-the-money standard put option having a first option price, wherein the out-of-the money standard call option and the out-of-the money standard put option are based on the identified underlying asset;

identify an other of the out-of-the-money standard call option or the out-of-the-money standard put option at the exchange, the other of the out-of-the-money standard call option or the out-of-the-money standard put option having a second option price which substantially offsets said first option price;

list, via a pricing data accumulation and dissemination module of the exchange backend system, the out-of-the-money standard call option and the out-of-the-money standard put option together as a package on the exchange; and

wherein both the out-of-the-money standard call option and the out-of-the-money standard put option are placed in a single order for the package.

12. The exchange of claim 11, wherein the exchange is configured to receive a first position in the package for a short position in the out-of-the-money standard call option and a long position in the out-of-the-money put option.

13. The exchange of claim 12, wherein the exchange is configured to receive a second position for the package for both a long position in the out-of-the-money call option and a short position in the out-of-the-money put option.

14. The exchange of claim 12, wherein the exchange is configured to receive a second position for the package for a long position in the out-of-the-money call option and a third position for a short position in the out-of-the-money call option.

15. The exchange of claim 11, wherein the exchange is configured to permit trading of the out-of-the-money standard call option and the out-of-the-money standard put option comprising the listed package as separate standard options after receiving the first position in the package.

16. The exchange of claim 11, wherein the exchange is configured to only permit the out-of-the-money standard call option and the out-of-the-money standard put option to be traded together as the package.

17. The exchange of claim 11, wherein to identify one of the out-of-the-money standard call option or the out-of-the-money standard put option the processor is configured to identify a desired first leg strike price, wherein the desired first leg strike price is a desired percentage value above or below the market price of the underlying asset, and the identified one of the out-of-the-money standard call option or the out-of-the-money standard put option is a standard call option or a standard put option having a strike price nearest the desired first leg strike price.

18. The exchange of claim 11, wherein the first option price is defined as a midpoint between a best bid and best offer for the identified one of the out-of-the-money standard call option or the out-of-the-money standard put option, and the second option price is a midpoint between a best bid and best offer for the other of the out-of-the-money standard call option or the out-of-the-money standard put option.

19. The exchange of claim 11, wherein the processor is further configured to publish bids and offers for the package of options, where the bids comprise a price investors are willing to pay to take both a short position in the identified out-of-the-money call option and a long position in the identified out-of-the-money put option, and the offers comprise a price investors are willing to pay to take both a long position in the identified call option and a short position in the identified put option.