Mar 2, 2016

CBOE Takes One Step Toward Exchange-Traded Exotics

CBOE announced yesterday, that in addition to "vanilla" FLEX options they will offer Asian and Cliquet options to be traded as well. I'm a little rusty on the terminology, so thankfully CBOE provided a handy explanation:
Asian options:   An Asian option, also known as an "averaging option," is an option whose settlement value is based on an average of the underlying index closing prices throughout the contract's life, as opposed to the single price at expiration.
Cliquet options:  A Cliquet option, sometimes referred to as a "ratchet option," is a series of at-the-money forward-start options where the total premium is determined in advance. CBOE is expected to offer a specific type of Cliquet known as the monthly sum cap with a global floor where the option holder receives the greater of zero or the sum of monthly capped returns.

This is obviously another effort from CBOE to capture some part of what now is on OTC derivatives market. With credit lines being what they are after 2008 it would make sense that fraction of exotics trading would end up facilitated by a major exchange and centrally cleared

So far  FLEX options have been a good way to be taken for a ride: from the first and second-hand stories I heard, you would pay huge bid-ask spread entering a trade, and there is no liquid market to exit the option, so you either hold to expiration or pay another huge spread to exit.

However I am excited about the development - if we see some volume in these contracts, it is not impossible that some market maker would step forward and request that they will become listed, probably on SPX Index. My bet is on Asian options, as they are more vanilla-like, and (highly non-technical description) trade at effectively lower volatility because of averaging.

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