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 FLEX trading.
Quotes for Equity FLEX options are generated only in response to a Request For Quote (RFQ). No FLEX option series, new or established, is continuously quoted. (However, orders may be entered into the FLEX electronic book on a daily basis). 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.
In 2007 CBOE launched CFLEX, the first internet based, electronic system for trading Index and Equity FLEX options available in the U.S. FLEX trades can be done electronically or in open outcry.
Electronic FLEX Trades: CFLEX
CFLEX, powered by Stockholm-based Cinnober Financial Technology, offers the speed, convenience and anonymity of a fully electronic trading platform and allows for a fully automated FLEX trading procedure. Features of CFLEX include:
- Internet based with an open API
- Firm sponsored terminals for end user customers
- Complete anonymity
- Strict price time matching algorithm
- Combination of orders and Request for Quotes
- Guaranteed participation rights
- Live Order Books
Click here for more information on CFLEX.
Step One: Request For Quote (RFQ)
The 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 FLEX Option series and must include the specific terms for the new series.
For more information on creating a FLEX option or the mechanics of trading FLEX options send an email to Flex@cboe.com, or call the CFLEX Helpdesk at 312-460-1941 during trading hours.
Trading Equity FLEX in Open Outcry Trading
FLEX trades may also be conducted on the CBOE trading floor through open-outcry trading. FLEX trades executed in open-outcry are reflected on the CFLEX system upon completion.
Upon submission, each RFQ is assigned a "Request Response Time" (RRT), currently a minimum of 3 to 5 minutes depending on the particular class, after receipt of the RFQ. This is the period of time designated for responses. Responsive bids and offers may be submitted verbally by in-crowd market-makers, member organizations, and floor brokers representing customers during this time. Responses may be modified at any time during the RRT.
At the end of the RRT, the best bid and offer (BBO) is announced by 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.
If the Submitting Member declines the BBO made in response to an RFQ, members 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 FLEX series must submit a new RFQ.
Information on completed trades, including execution price and size, are transmitted as Administrative Text Messages through the Options Price Reporting Authority (OPRA) system to quote vendors.
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.
Trading in an existing FLEX Option series employs the same methodology that is used for initial FLEX transactions, i.e., quotes are only available upon submission of an RFQ. Size is specified in number of contracts, provided that closing transaction restrictions are observed.
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 closing transaction restrictions are observed.
Information Regarding Open FLEX Series
To see FLEX options that have been created and have open interest, visit the OCC website: http://www.theocc.com/webapps/flex-reports.
FLEX Trades are cleared in much the same way as standard listed options. Trades are matched intraday to reduce possible errors before transmission to OCC for clearance and settlement. OCC provides daily closing prices for all FLEX series with open interest, available on the OCC website at: http://www.theocc.com/webapps/flex-reports.