FLEX Options

E-FLEX Options — Learn more about Flexible Exchange Options


	E-FLEX Options are especially designed to extend investor access to customize products—learn how. Table of Contents Introduction Using Equity FLEX Options Customizing Equity FLEX Options Trading Equity FLEX Options Creating an E-FLEX Series Spread Transactions Secondary Trading Trade Clearing Exercising Equity FLEX Options Customer Margin Quote Vendor Information How to Access E-FLEX Trade Information FLEX Abbreviations on Terminal Screens For More Information INTRODUCTION A significant milestone was reached by U.S. options exchanges in 1993 with the development of FLexible EXchange^® Options (FLEX^® Options). Introduced for the trading of index options, FLEX Options allowed users, for the very first time, to select contract terms for exchange-listed options. Now FLEX Options have been broadened to encompass listed equity options, providing important stock option opportunities: the ability to custom-tailor most contract terms and to enjoy expanded position limits. This site discusses Equity FLEX Options (E-FLEX Options) that are traded at the American Stock Exchange (AMEX), the Chicago Board Options Exchange (CBOE) and the Pacific Stock Exchange (PSE). E-FLEX Options offer you the newest in risk management instruments, especially designed to extend investor access to customized derivative products. With E-FLEX Options, you have the ability to create customized equity options — options on stocks that you design to fit your own investment strategies and goals. More importantly Equity FLEX Options provide you with: the price discovery of competitive auction markets a secondary market to offset or alter positions an independent daily valuation of prices contract guarantee and virtual elimination of trading counterparty risk The issuer and guarantor of all E-FLEX Option contracts is The Options Clearing Corporation (OCC), the only clearinghouse worldwide to receive a "AAA" credit rating from Standard & Poor’s Corporation. While an over-the-counter market currently exists for customized options, it cannot provide the benefit of OCC issuance and clearance nor the price transparency and competitive bidding process of exchange auction markets. A primary benefit of E-FLEX Options is the ability to customize key contract terms, like exercise prices, exercise styles and expiration dates. And E-FLEX Options provide the opportunity to trade in size, with no position or exercise limits. Return to top USING EQUITY FLEX OPTIONS The Many Possibilities. An expansion of opportunities — that’s one of the prime benefits of E-FLEX Options — to provide new ways to fine-tune option strategies and more precisely target trading objectives. E-FLEX Options provide new power and versatility to virtually every option strategy. Here’s a brief look at some of the many possibilities: Of particular interest to holders of restricted stock, zero-cost collars can be established, providing downside protection and limited upside gain at no net cost. Large stockholders can effectively close their positions with lower market impact by selling customized calls that have been created as part of an exit strategy. Institutions can amplify protection for their stock holdings by buying customized puts, limiting downside risk and taking advantage of expanded position limits. Investors can establish a synthetic short stock position by simultaneously buying customized puts and selling customized calls, avoiding early stock recalls and dividend payment concerns. Investors can establish a synthetic long stock position — at a lower cash outlay than an actual stock purchase — by simultaneously selling customized puts and buying customized calls. Corporate stock repurchase programs can now sell customized puts creating the potential to buy back stock at a predetermined price while generating additional income. Return to top CUSTOMIZING EQUITY FLEX OPTIONS Pick Your Stocks. Name Your Terms. The choices are many for E-FLEX Option users. While you can custom-tailor most contract terms, you may also select from an array of actively traded underlying stocks. Current E-FLEX Option offerings of the Amex, CBOE and PSE may be obtained from the exchanges. E-FLEX Options are the only exchange-listed equity options that allow users to select option contract terms. E-FLEX Option terms that can be customized are: Type of Option — Can be Calls or Puts. Expiration Date — Can be selected to expire up to a maximum of three years from trade date, down to a minimum of one day for a newly created series (same-day expiration not permitted for a newly created series). The expiration date specified must be a business day and cannot fall on the third Friday of the expiration month (or the first preceding business day, if the third Friday is a holiday) or two business days on either side of each of these days. If, for example, the third Friday of June is 6/18, expiration dates for E-FLEX Options could not include the business days of 6/16, 6/17, 6/18, 6/21 or 6/22. Exercise Style — Can be American or European style. Exercise Price — For Calls: strike prices may be set only at standard intervals — 2 1/2 points for strike prices at $25 or less; 5 points for strike prices over $25 through $200; and 10 points for strike prices over $200. Exception: Several option classes (all part of a strike price pilot program) may have strike prices at 2 1/2 -point intervals up to $50. For Puts: strike prices can be a dollar value (e.g., 37 1/8) or percentage of the underlying stock price (e.g., 95% of the current price). A strike price specified as a percentage will be rounded to the nearest eighth. Size — One E-FLEX option contract represents 100 shares of the underlying stock. A minimum of 250 contracts is required to create a new Equity FLEX series. A minimum of 100 contracts (or a participant’s entire remaining position for a closing transaction when it is fewer than 100 contracts) is required for trading a currently open E-FLEX series. Current open series information is available daily from each exchange. Position and Exercise Limits — Position and exercise limits on E-FLEX Options have been set at three times the limits of standard equity options on the same side of the market. However, E-FLEX Option positions will not be aggregated with standard options. There are five tiers of unhedged position and exercise limits for standard equity options: 25,000, 20,000, 10,500, 7,500 and 4,500 contracts. All equity option classes are reviewed on a semiannual basis (January 1 and July 1) to determine whether any such class is eligible for a higher tier limit or has failed to meet the eligibility requirements for its current limit. Eligibility requirements are based on the number of outstanding shares and past six-month trading volume of the underlying security. Factors such as stock splits and stock dividends may cause position and exercise limits to be altered for a fixed period of time. Settlement — All E-FLEX Options are settled by physical delivery (i.e., shares of the respective underlying stock). Return to top TRADING EQUITY FLEX OPTIONS Equity FLEX Option orders are exposed to competitive price discovery just as conventional options are. However, there are also some features unique to E-FLEX trading. In contrast to conventional options trading, Equity FLEX quotes are generated only in response to a Request For Quote (RFQ), rather than from an order. No FLEX option series, new or established, is continuously quoted. This modified version of the standardized options trading system, along with special procedures for the RFQ market, has been developed to ensure that each customer order is exposed to a competitive auction process for price discovery. Return to top Creating An E-FLEX Series The E-FLEX trading process begins with the submission of an RFQ by a participating exchange member ("Submitting Member"). The RFQ signifies the Submitting Member’s interest in creating a new E-FLEX Option series and must include the specific terms for the new series. A minimum size of 250 contracts is required to open a new E-FLEX series. Upon submission, an RFQ is disseminated as an Administrative Text Message over the Options Price Reporting Authority (OPRA). This text message contains all of the contract terms — underlying stock, size, type of option, expiration date, strike price and exercise style — and can be received via the quotation terminals of OPRA vendors who offer FLEX service. This is to ensure that both on- and off-floor members have access to all E-FLEX quote requests. Each RFQ will be assigned a "Request Response Time" (RRT), currently from 2 to 20 minutes after receipt of the RFQ. This is the period of time designated for responses — bids and offers may be submitted by exchange members on behalf of customers during this time. Quotes may be modified at any time during the RRT. Responsive quotes are made verbally at the post where the standard equity option is traded. At the end of the RRT, the best bid and offer (BBO) is reported to the Submitting Member who may accept all or part of the BBO, seek to improve the BBO, or reject the entire BBO. The Submitting Member is not obligated to accept the BBO. See below for quote vendors and how to access E-FLEX trade information. If the Submitting Member declines the BBO made in response to an RFQ, a member may accept the best bid or offer up to the size currently represented; or if the Submitting Member accepts the best bid or offer, but there is excess size available at the BBO, members may trade the balance available. If it is determined that no further interest exists in the bids and offers submitted in response to an RFQ, the market for that RFQ is closed and the quotes are no longer valid. Any member interested in trading the same E-FLEX series must submit a new RFQ. Details of quotes, as well as information on completed trades, including execution price and size, are also transmitted as Administrative Text Messages through the OPRA system to vendors. Return to top Spread Transactions Option spread transactions and other combination trades may be requested and traded on a net-cost basis. The prices of the individual "legs" of the spread will be determined and will be compared and cleared as separate contracts. Return to top Secondary Trading Trading in an existing Equity FLEX Option series employs the same methodology that is used for initial E-FLEX transactions, i.e., quotes are only available upon submission of an RFQ. Once an RFQ is submitted for an open E-FLEX series, trading is conducted following the same procedures as those used in creating a new E-FLEX series. Whenever there is existing open interest in a previously created E-FLEX Option series, that series may be traded in minimum increments of 100 contracts. An E-FLEX closing transaction for fewer than 100 contracts may take place if it is for the participant’s entire remaining position in that series. For secondary trading, RFQs can only specify the strike price in the existing numerical format of the specific series, not a percentage format. Size is specified in number of contracts, provided that size minimums are met and closing transaction restrictions are observed. Return to top Trade Clearing Trades are matched intraday to reduce possible errors before transmission to OCC for clearance and settlement. OCC also provides daily valuation prices for all E-FLEX series. Return to top Exercising Equity FLEX Options The exercise procedures for E-FLEX Options are the same as standard equity options procedures. Exercise of E-FLEX Options results in physical delivery of stock on the next business day following tender of exercise notice. The minimum size for Equity FLEX Options exercises is 100 contracts or the participant’s entire remaining position in the series, whichever is less. Return to top Customer Margin E-FLEX Options are subject to the customer margin rules of the exchanges and Regulation T as promulgated by the Federal Reserve and are similar to those for conventional listed options. Uncovered writers of E-FLEX Options have a margin requirement equal to 100% of current option market value plus 20% of the underlying value less any out-of-the-money amount, subject to a minimum of 100% of the current option market value plus 10% of the current underlying stock value. Spreads and combinations will be permitted for margin purposes between Equity FLEX Options with different exercise styles (American vs European) and/or conventional equity options on the same underlying security. Please be aware that due to different exercise features, 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. Return to top Quote Vendor Information How to Access E-FLEX Trade Information The following quote vendors currently display on-line updates of E-FLEX information. Each terminal currently enabled for options data will display FLEX information. The format currently provided by vendors includes RFQs, quotes and prices in a news headline format. Bloomberg Financial Markets: Type FLEX[Go] for page display of all FLEX messages for all exchanges. Type FLXD[Go] to filter messages displayed by FLEX[Go] function. User may select type and/or exchange. For customer support, call Bloomberg Analytics, (800) 357-7555. ILX Systems: Available through the Market Pulse/Business Pulse display. Use [F12] for Market Pulse page. Enter FLEX on command line to view all FLEX messages for all exchanges. [Enter] must be used for updated information once page has been accessed. For customer support, call (800) 654-5657. Reuters America, Inc.: Type XYZ/FLXA [Enter] for most recent E-FLEX activity for all exchanges. Type XYZ/FLXB through Z [Enter] for today’s history of E-FLEX activity for all exchanges. For customer support, call (800) 435-0101. Track Data: Type .FLEX [News Recall] for page display of all FLEX messages for all exchanges. If your terminal is not currently options data enabled but should be, you have to recreate News Recall Window and News Headline Window. For customer support, call (888) 832-2878. Return to top FLEX Abbreviations on Terminal Screens ADM Administrative text message AMR/AMER American-style exercise CLS Quote to be based on closing value of stock CMBO Order is combination with standard option contract EUR European-style exercise HDG E-FLEX transaction contingent upon transaction in a security listed on another exchange IND Indicative quote LIVE QTE Quote to be based on current value of underlying stock LST Execution of referenced RFQ QTE Best market quote for referenced RFQ RFQ (#) Request For Quote (assigned number) SPRD Spread, etc., transaction STDL Straddle STRANGLE Strangle Return to top FOR MORE INFORMATION American Stock Exchange Derivative Securities 86 Trinity Place New York, NY 10006-1881 USA 800-THE-AMEX, U.S. and Canada; 212-306-1000 Web site http://www.amex.com e-mail jstephane@amex.com Chicago Board Options Exchange 400 S. LaSalle Street Chicago, IL 60605 USA 800-OPTIONS, U.S. and Canada; 312-786-4100 Or call toll-free from the following countries: France 05-90-0508 Germany 0130-8-14683 Mexico 95-800-507-7377 The Netherlands 06-022-4127 Switzerland 155-1575 United Kingdom 0800-89-2299 Web site http://www.cboe.com e-mailinvestor_services@cboe.com Pacific Stock Exchange Options Marketing, Research & Education 301 Pine Street San Francisco, CA 94104 USA 800-TALK-PSE, U.S. and Canada; 415-393-4028 Philadelphia Stock Exchange 1900 Market Street Philadelphia, PA 19103-3584 USA 800-THE-PHLX, U.S. and Canada; 215-496-5404 European Office: 12th Floor, Moor House 119 London Wall London EC2Y 5ET England 44-171-606-2348 Far East toll-free access: Australia 800-12-7570 Hong Kong 800-6893 Japan 0031-122868 Singapore 800-1200542 Non toll-free access from other countries: 215-496-1611 Web site http://www.phlx.com e-mailinfo@phlx.com This site discusses exchange-traded Equity FLEX Options issued by The Options Clearing Corporation. This site has been prepared for educational purposes only. It is not a prospectus, and no statement on this site is to be construed as a recommendation to purchase or sell a security or to provide investment advice. Equity FLEX Options involve risk and are not suitable for all investors. Prior to buying or selling Equity FLEX Options, a person must receive a copy of Characteristics and Risks of Standardized Options and, no later than the time of confirmation of an E-FLEX transaction, must also receive a copy of the Equity FLEX Options supplement and should thoroughly understand the risks involved in any use of options. Copies may be obtained from your broker, The Options Clearing Corporation, 440 S. LaSalle Street, Chicago, IL 60605; the American Stock Exchange; the Chicago Board Options Exchange or the Pacific Stock Exchange (see above for addresses and phone numbers). � 1996, American Stock Exchange, Inc., Chicago Board Options Exchange, Inc., and Pacific Stock Exchange, Inc.