Packaged Standard Option Collars Exchange Trading
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Solution Overview
Problem
Existing exchange systems face complications in trading collars due to limitations in trading standard option contracts with prescribed strike-price intervals, making it difficult to assemble offsetting positions, which is not possible in over-the-counter markets where customization is allowed but may limit liquidity.
Innovation Solution
A method for creating and trading packaged standard options collars on an exchange by selecting opposite positions in out-of-the-money call and put option contracts based on the same underlying asset, with strike prices determined by a 'moneyness factor' and option prices offsetting each other, allowing for listing on an exchange and execution through matching orders.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Quantity of substance
If standard option contracts with prescribed strike-price intervals are traded on an exchange, then market liquidity and accessibility are improved, but the ability to assemble offsetting collar positions is compromised
Solution Approach 1:
The collar position is segmented into two separate standard option contracts (call and put options) with different strike prices. Each option is traded independently on the exchange using standard contracts, but they are combined to form the complete collar position. This allows the benefits of standardized exchange trading while achieving the desired offsetting structure.
Solution Approach 2:
The patent merges the purchase of a put option and the sale of a call option into a single packaged collar instrument. This combination allows investors to obtain both legs of the collar position through one transaction on the exchange, maintaining standardization while achieving the risk management functionality that would otherwise require assembling multiple separate contracts.
2Adaptability or versatility
If customized collar positions are created in over-the-counter markets, then adaptability to specific investor needs is improved, but market liquidity is limited
Solution Approach 1:
The packaged collar is designed as a universal instrument that can be traded on the exchange using standard contracts. The structure allows for general applicability across different underlying assets and investor needs while maintaining the flexibility to customize strike prices and expiration dates within the constraints of standard exchange contracts. This universality enables better liquidity compared to purely customized OTC instruments.
Data Source
AI summary
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.