Binary put options 90 scheme

In return for their obligations, the writers receive an upfront cash payment or premium from the buyers. FRO financial product is that the purchaser and writer of the FRO financial product know the expected return at the time of purchase if the underlying security performs as expected. Option sellers assume a legal obligation under the option contracts to fulfill the contracts if the options are assigned to them, whereas the premiums are the extent of the potential risk to option buyers. PQR December 95 Finish High. In such a market, large financial institutions serve as derivatives dealers, customizing products for the needs of particular clients. Market fairness and integrity is a necessary underpinning of any market, as well as in the trading in any particular product or security upon any market. Selling or writing an option, however, provides an obligation to perform if the party purchasing the option chooses to exercise. Therefore, for a single stock there are often several options series traded and it is not unusual to have 60 different options series available for a single stock or options class. As illustrated in FIG. The following detailed description is, therefore, not to be taken in a limiting sense and the scope of the present invention is defined by the appended claims and their equivalents.

The second computer program product may include means for inputting data from an exchange or exchanges comprising the number of shares of the underlying security and the price of the underlying security for a predetermined amount of time before market close. The specialist post 430 is a specific location on the trading floor of the Exchange designated for the trading of a specific option class. Certain derivatives provide for the purchase or sale of an underlying asset. VWAP pricing mechanism makes it much less practical to manipulate the price of the underlying securities in order to meet the strike price. Selling or writing an option therefore presents the seller with limited profit potential and significant risk unless the position is properly hedged. Options can be used in a variety of ways to profit from a rise or fall in the market.

For simplicity and illustrative purposes, the principles of the present invention are described by referring mainly to the embodiment as intended to be employed by the Amex. Similarly, not all expiration months are simultaneously available for all standardized option series. PQR October 70 Call. OTC, where systems and processes are more flexible and can be made to recognize and accept a vast scope of varying option contract terms, and where a symbology scheme does not exist to limit product scope. FRO financial product is processed as a put option. Buying an option offers limited risk and unlimited profit potential. In other embodiments, the expiration symbol and strike price symbols utilize the existing option contract symbol library for their respective symbol. Accordingly, plain vanilla derivatives are typically more common and represent a greater share of the derivatives marketplace as compared to exotics.

Binary options have never been traded on a national securities exchange in a standardized form. In the OTC markets, this benefit does not exist. Option contracts are a form of derivative instrument. To that end, a mapping algorithm may be utilized to create symbols that represent the underlying security, the fact that the option is a binary option or FRO as opposed to a typical put or call option, the expiration date and the strike price, where the symbols are then listed for trading on an exchange. The premium amount represents the actual price an investor pays to purchase an option or receives for selling an option. The final character denotes the strike price for the option. Derivative instruments are further categorized in various ways.

With current standardized options there are standardized procedures that are followed to determine the settlement closing prices. Each option traded at a particular post is managed by an assigned specialist. Chicago Mercantile Exchange Inc. Also included are methods for calculating the closing settlement value for securities underlying fixed return options or binary options in order to maintain a fair and orderly trading environment for these instruments on an organized exchange. If the settlement value is less than the strike price, the writer pays nothing 540. The exercise threshold amount effectively triggers an automatic exercise.

An embodiment of the invention generally relates to a specific method, uniquely applied, for calculating the closing settlement value of a security underlying a FRO or binary option, which method and application create necessary conditions for the trading of these instruments in standardized format on an organized exchange. Each character has 26 possibilities, corresponding to the 26 letters of the alphabet. The major components affecting the price or premium are the current price of the underlying security, the type of option, the strike price compared to the current market price of the underlying security, the amount of time remaining to expiration, the volatility of the underlying security and interest rates. An amount of time prior to the market close at expiration is selected, for example, 15 minutes. The root symbol may comprise up to three characters. There is a need in the art to provide liquidity in the binary options market, and there thus exists a need in the art for systems and methods for trading binary options on an exchange in a standardized form.

Options directly based on an underlying security or securities are solely listed and traded on securities exchanges. Standardized call and put equity options traded on the options exchange require a holder to tender exercise instructions in order for the option to be exercise or not exercised at expiration. The time value portion of the premium depends on the volatility of the underlying security. During that time, each transaction involving the underlying security is recorded as a number of shares sold and a selling price for those shares. FRO, the identity of the underlying security, and the expiration month. FROs or binary options.

An example of the organizational structure of an exchange such as those on which some options are currently traded is illustrated in FIG. The strike price codes are listed in table II. The latter have payoff diagrams with curvature, either convex or concave, as shown in FIG. Such a limitation is practical to avoid creating options for which there would be very little demand because of the small likelihood that much greater price fluctuations would occur. Moreover, there are several strike prices available for each expiration month of each option. Systems for calculating delivery and payment amounts due between participating parties rely on this standardization. With respect to traditional options, the 100 multiplier indicates that 100 shares of the underlying security are represented by a single option. An instrument is described as trading OTC if it trades in some context other than on or through an organized exchange. The primary benefit of standardization and the reason for the tremendous liquidity is the interchangability or fungibility of option contracts regardless of where the option was originally executed.

The expiration date designates the last day on which an option may be exercised. The institution in these cases is the issuer of the contract and establishes, if applicable, the market for the binary option. This leaves the remaining two characters to indicate the lower and upper strike prices. In order to allow the FRO financial product to trade on secondary markets, one embodiment of the invention is a method for listing the FRO financial product, and having the product recognized by the various systems used currently for the listing, trading, transmitting, clearing and settling of standardized options, including those systems utilized by the OCC. Saturday following the third Friday of any given month. The value of the payoff is not affected by the magnitude of the difference between the underlying asset or index and the strike price. Options of stocks that are volatile generally require a higher premium due to the greater inherent risk. FRO financial product class, illustrated in FIG.

Commodity exchanges generally list and trade futures contracts and options on futures contracts. The pricing of options contracts is complex. Chicago Mercantile Exchange, Inc. Binary options have been traded for some time in an OTC environment between institutional traders but not on a national securities exchange. In one embodiment, the symbols provide sufficient information for existing trading, clearance, margin, and settlement systems to process transactions involving the FRO based on the symbols assigned by the computer program product to the FRO. Plain vanilla derivatives generally provide for simple structures, while exotic derivatives generally provide for more complicated structures that are specifically tailored to an individual need, method, or situation. FRO financial product pays a fixed amount of cash when the settlement value of the underlying security is within a range of two strike prices at the expiration date. Saturday in October The symbol for this standardized option is PQRJN.

FRO financial product versus their OTC binary option counterpart is that standardized clearing and settlement systems may be programmed to recognize FROs based on their unique underlying symbols and segregation for particular treatment by systems used for calculating permissible margin as well as final payout amounts due at settlement. With cash settlement, the underlying asset is not physically delivered. The current MPV for standardized options is set by Exchange rule approved by the SEC to accommodate a finite trading capacity. Since the adoption of the Securities Exchange Act of 1934, which created the SEC, particular focus has been paid to ensure that markets are not susceptible to manipulation. At expiration, the option becomes worthless. Saturday of the expiration month. Exchange member whose function is to maintain a fair and orderly market in a given option class. In these embodiments, the systems and processes for trading conventional options may then simply use the different multiplier code as an additional or distinct method for identifying options as FROs and, therefore, segregating them for appropriate routing and processing. FRO, two predetermined strike prices, a first lower strike price and a second upper strike price, are set, along with the expiration date 720.

If, on the expiration date, the settlement value of the underlying security is greater than the first strike price 730, and is less than the second strike price 750, then the writer pays the payoff price 770. Scholes Options Pricing Model have been developed to directly address varying assumptions and scenarios. The exact price at which any security closes on any given day can have important consequences. The buyer of a put option hopes the price of the underlying stock decreases by the expiration date, while the seller hopes the price of the underlying security remains flat or increases. In one aspect of an embodiment of the invention, the OCC will issue and clear transactions in FROs as it currently does for all existing standardized options. By law, standardized equity options traded in the United States may only occur on a national securities exchange registered with the SEC.

The system may further include means for calculating the closing settlement value of a security underlying the FRO using a VWAP of the security. An embodiment of the invention generally relates to a binary option, herein referred to as a FRO financial product, and the systems and methods applied to enable the product to trade in standardized format on an organized exchange. First, as illustrated in FIG. Generally, there are several expiration months available for each equity option. An expiration symbol is generated for the expiration date of the FRO product and concatenated to the root symbol 820. The former have payoff amounts that behave like a line, as shown in FIG. United States represents the right to purchase or sell 100 shares of an underlying asset.

It is within the scope of the invention that other symbol libraries may be used for the root, expiration, and strike price symbols. In one embodiment, the performance or payoff of the FRO financial product is based on the predicted performance of an underlying security over a predetermined amount of time. Subsequently, a strike price symbol is generated for the strike price for the underlying security and concatenated to the existing combination of the root symbol and expiration symbol 830. In one embodiment, a second computer program product computes a closing settlement value of a security underlying the FRO using a VWAP of the security. The issuer of each option contract is the OCC regardless of where the option trades. However, one of ordinary skill in the art would readily recognize that the embodiments of the invention are equally applicable to, and can be implemented in, many types of organized exchange processing systems, and that any such variations do not depart from the true spirit and scope of the present invention.

No existing standardized option currently trading on organized exchanges has such structure. FRO financial product 710. FROs so that they may be recognized as such by systems and individuals for appropriate processing. FRO as well as the underlying asset. The majority of derivative products are traded OTC. Adams, Viner And Mosler, Ltd. Thus, it will be apparent that for each options class, there may be several option series, each of which are separately priced. For example, assume PQR Corp. The writer cannot change or define any strike price, but for any given option, must select from a specific set of available strike prices.

Options traded on national securities exchanges are generally traded based on an underlying equity or index meeting approved listing standards that have an appropriate pricing mechanism. Calculation of the VWAP may be accomplished using the following algorithm, for example, a computer means with pricing inputs from one or more exchanges or markets. There is also variation in the method for settling option transactions. Volatility is a measure of the amount by which an underlying security is expected to fluctuate in a given period of time. FRO related to the same underlying asset. As a result, the quoted price is multiplied by 100 to derive the actual contract purchase price or premium in dollars.

The purchaser or holder of an option pays a premium for the right but not the obligation, to exercise the option contract. The system may further include a means for processing transactions involving the FRO using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the FRO. In some embodiments of the invention, the multiplier of the FRO may be 100 as with traditional standardized options. In some embodiments, a computer means may be used to execute the mapping algorithm to create FRO symbols. For example, a binary call option at a strike price for the underlying asset of 75 would pay the same amount if, at expiration, the underlying asset price was at 76, 80, 85, 95 or any other price above 75. Sellers or writers of options typically expect the price of the underlying security to remain flat or move in the desired direction. The method may further comprise the step of processing transactions involving the FRO using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the FRO.

The OCC is able to recognize, segregate, calculate and disseminate information from the various exchanges, and to facilitate the fungibility described above in large part due to the standardized symbology scheme detailed below. Provisional Patent Applications Ser. For example, a stock option is a derivative because it derives its value from the value of an underlying stock. Binary options can be European or American exercise style and can be structured as calls or puts. The intrinsic value of a call option is thus the market price of the underlying securities minus the strike price of the option, and the intrinsic value of a put option is the strike price minus the market price. For each transaction involving the underlying security during the preselected time, the number of shares is multiplied by the selling price for those shares to calculate a transaction price. PQR October 70 Call option is a contract giving the holder the right to buy 100 shares of PQR Corp.

Thus, existing clearing and settlement systems may not difficult be adapted to handle transactions in FROs without any structural changes to the systems, and with only minimal effort. In various embodiments of the invention, the fixed return amount for FROs may be set for all FROs at some standard price. Moreover, while in the following detailed description, references are made to the accompanying figures, which illustrate specific embodiments, changes may be made to the embodiments without departing from the spirit and scope of the present invention. The convention allows for options to have symbols with a maximum of 5 characters. In some embodiments, the FRO financial products of the invention have three broad types or classes of products based on the predicted performance of the underlying security. OTC binary options have several drawbacks and disadvantages. Systems used by the OCC and other parties to give proper routing and accounting treatment to particular financial products, such as systems that recognize various product types and calculate appropriate margin amounts for particular products, must be adapted to recognize the FRO instruments as separate and distinct.

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