Single-Action Options Strips for Synthetic Variance Swaps
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Solution Overview
Problem
Futures trading systems face challenges such as computational burdens from rolling contracts, limitations in fractional trading, and exposure to counterparty risk in variance swaps, which are traditionally customized and traded over the counter, leading to inefficiencies and risks for traders.
Innovation Solution
A user interface that enables traders to acquire synthetic variance swap positions through a single action, utilizing a strip of options contracts to minimize slippage risk and automate the calculation of necessary quantities, allowing for seamless pricing and execution of variance strips, including convexity locks, to manage the conversion between simple and log variance positions.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If traders manually construct and execute variance swap positions using multiple options contracts, then they can achieve synthetic variance swap exposure, but the process is computationally complex and time-consuming, increasing slippage risk
Solution Approach 1:
The patent combines multiple options contracts into a unified 'variance strip' product that can be executed as a single atomic transaction. This merging of individual options (calls and puts with different strikes) into one tradable instrument eliminates the need for manual construction and simultaneous execution of multiple legs, thereby reducing execution time and slippage risk while maintaining the synthetic variance swap exposure.
Solution Approach 2:
The patent creates a simplified copy of the complex variance swap structure in the form of a standardized variance strip product. This copy replicates the economic characteristics of a synthetic variance swap (using a basket of options) but presents it as a single, easily executable contract, making the complex underlying structure accessible without requiring traders to manually reconstruct the option portfolio.
2Ease of operation
If futures contracts are standardized with fixed units, then trading is simplified and exchange-compliant, but traders cannot allocate fractional amounts of cash, leaving idle cash unused
Solution Approach 1:
The patent segments the futures contract unit into smaller, tradable portions by introducing fractional lot sizes. Instead of requiring whole contract units (e.g., 1,000 barrels of crude oil), the system allows traders to execute fractional positions (e.g., 0.5 lots or 500 barrels). This segmentation maintains the standardized contract structure for exchange compliance while enabling flexible cash allocation, allowing traders to invest precise amounts of capital without leaving cash idle.
3Object-affected harmful factors
If traders roll futures contracts close to expiration to avoid settlement obligations, then they avoid delivery costs, but the rolling process creates computational and logistical burdens
Solution Approach 1:
The patent extracts the rolling operation from the manual, complex process and implements it as an automated system feature. The platform automatically monitors contract expiration dates and executes the rolling process (selling near-month contracts and buying deferred-month contracts) without trader intervention. This extraction of the rolling function into an automated system eliminates the computational and logistical burdens on traders while still achieving the goal of avoiding settlement obligations.
4Manufacturing precision
If variance swaps are traded over the counter as customized instruments, then traders can achieve precise variance exposure, but counterparty risk is exposed and trading efficiency is reduced
Solution Approach 1:
The patent introduces a centralized exchange platform as an intermediary between traders and the variance strip market. Instead of trading customized variance swaps over the counter where counterparty risk is direct, traders now access standardized variance strip products through a regulated exchange. This intermediary (the exchange) provides clearing and guarantee services, reducing counterparty risk while maintaining the precise variance exposure through the standardized product structure.
Data Source
AI summary
The disclosed embodiments relate to a user interface which enables a trader to acquire a synthetic variance swap position, comprising a plurality of options contracts on an underlier, such as an underlying futures contract, in single action thereby avoiding slippage risk. Furthermore, the disclosed user interface allows a trader to acquire a synthetic log variance position, a synthetic simple variance position and/or a “convexity lock” position. A convexity lock position comprises a set of options contracts which, in combination with a synthetic log variance position results in a portfolio having an equivalent synthetic simple variance position, and in combination with a synthetic simple variance position, results in a portfolio having an equivalent synthetic log variance position.