Flexible Exchange Option (FLEX) Definition

What Is a Versatile Trade Choice?

Versatile alternate choices, or FLEX choices, are nonstandard choices that enable each the author and purchaser to barter numerous phrases. Phrases which can be negotiable embody the train type, strike worth, and expiration date, in addition to different options and advantages. These choices additionally give buyers the chance to commerce on a bigger scale with expanded or eradicated place limits.

Understanding Versatile Trade Choice (FLEX)

FLEX choices had been created in 1993 by the Cboe Choices Trade (Cboe). The choices goal the over-the-counter (OTC) market of index choices and supply prospects with extra flexibility. FLEX choices now commerce on different exchanges in addition to the Cboe.

Other than permitting each the client and vendor to customise contract phrases to their liking, FLEX choices present different advantages. These advantages embody safety from counterparty danger related to over-the-counter buying and selling. Trades are assured by the Choices Clearing Company (OCC) as are different alternate traded choices.

The market can also be extra aggressive and clear for elevated liquidity. A secondary market permits consumers and sellers to offset positions earlier than expiration. This secondary market removes a few of the dangers of buying and selling in off-exchange markets.

A major distinction between FLEX choices and conventional choices is that FLEX choices should not have a steady quote stream. Subsequently, the era of a quote for FLEX choices happens solely when a request for quote (RFQ) is made.

In 2007, the Cboe launched CFLEX, an Web-based, digital buying and selling system for index and fairness FLEX choices. Merchants enter each day orders into the FLEX digital ebook.

Elements of a FLEX Choice Contract

The minimal dimension for a FLEX choice is one contract. Strike costs could also be in penny increments and can also be within the equal of a proportion of the underlying inventory.

Illustration of premiums could also be within the worth of particular greenback quantities and are sometimes in penny increments, or in percentages of the underlying inventory. 

An expiration date might be any enterprise day and might be future-dated so far as 15 years from the date of the commerce. Expiration kinds could also be American or European. American expiration permits for train at any time earlier than the contract ends. European expiration permits train solely on the expiration date.

Fairness FLEX choices, each places and calls, settle with the supply of shares of inventory if exercised. Index FLEX choices will settle in money.

Place Limits for Versatile Trade Choices

There aren’t any place limits for FLEX choices on main market indexes, together with the Dow Jones Industrial Common, Nasdaq-100, Russell 2000, S&P 500, and S&P 100. Nevertheless, there are reporting necessities if place sizes exceed sure thresholds.

The place limits for broad-based Index FLEX Choices, aside from these listed above, are 200,000 contracts, with contracts being on the identical aspect of the marketplace for every given index.

There aren’t any place limits for fairness or ETF FLEX choices, though there are reporting necessities.