What It Is
- The Chicago Board Options Exchange (CBOE) and the CBOE Stock Exchange (CBSX) are offering fully automated executions for combined option and stock trades through a single electronic platform. Stock-option orders of various ratios, including, but not limited to: delta neutrals; conversions; and reversals. These are all eligible for AIM (Automated Improvement Mechanism) and COA (Complex Order Auction).
- A cross product spread order, also referred to as a covered call, generally is considered to be an investment strategy in which an investor buys a stock or a basket of stocks, and also sells call options that correspond to the stock or basket of stocks. A "married put" is an investment strategy in which an investor purchases puts while at the same time purchasing an equivalent number of shares of the underlying stock. Both strategies may be used to enhance portfolio returns and reduce volatility. For instance, over the last 12 calendar months, the CBOE S&P 500 BuyWrite Index (BXM) has outperformed the Total Return S&P 500 Index by 14.5 percentage points.
- This automated execution of a combination of options and associated stock trades, in numerous types, allows for the simultaneous execution of both the stock and option legs of any position trade in a 100:1 ratio all on a single electronic platform. It advantages investors executing buy write or married put strategies but can be used for any trade combining stock and option orders. Traders benefit by faster execution and the opportunity for price improvement.
How It Works
- The CBOE/CBSX technology electronically pairs a single option leg with a stock leg in a one-to-one ratio, thereby effectively automating the process of implementing a cross product spread trade.
- Upon receipt of the order - which is accepted as a package - in the system, eligible incoming orders will initiate a one second electronic Complex Order Auction (COA). The order is then auctioned as a packaged order with one net price, and traders can respond to the auction in penny price increments. This results in potential price improvement on the option side of the transaction. Orders that are not marketable at the conclusion of the auction route to the exchange's Complex Order Book (COB) and continuously re-auctions the order if it becomes marketable. When executed, the option leg of the order "prints," or reports, on CBOE, while the stock leg prints on CBSX.
- Additionally, it is possible for such cross product pairs to trade against existing liquidity on CBOE and CBSX. This functionality allows CBSX liquidity providers to interact with a unique pool of liquidity takers not found on other equity markets.
- The COB will accept stock/option orders, up to 4 legs, in all permissible ratios. Orders will be eligible to execute in COB if: (A) touched by an opposing stock/option order; or (B) the CBSX is on the NBBO and the net price on the resting order is marketable against the CBSX market and the CBOE options BBO. Further, resting orders will electronically re-auction once the order is within two ticks of the net market as determined by the stock NBBO and CBOE BBO.
Charting It Out
The chart below details the flow of a cross-product spread trade
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