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LIFFE CONNECT® allows the creation of recognized strategies that are separate from the order books of the outright markets. Traders can submit orders and trade in these strategy markets. The following sections detail the creation process, list the strategies available and explain how strategies are priced.
Strategies between outright futures months or options strikes need to be created before they can be quoted in or traded. Once a strategy has been created it is assigned an AMR and keeps this until any of its underlying legs expires and then the strategy no longer exists.
A strategy will be visible to end users on the day of its creation, but will not be visible on the next day unless a GTC order is still present at the end of the previous day.
This means that although the strategy will exist in the Trading Host and will have an AMR, it will have to be recreated again before any quotes/trading is possible.
2.4.1.1 GTC Strategies
Traders do not have to recreate the strategies for their GTC orders as they are automatically recreated by the Trading Host when the GTC orders are returned to the market.
GTC orders in delta neutral strategies are not retained by the Trading Host and have to be recreated on a daily basis.
2.4.1.2 Creation by Traders
A trader must create a LIFFE CONNECT recognized strategy in the long (Buy) position. For example, the futures Calendar Spread must be created in terms of buying the near month to sell the far month. If a trader attempts to specify the legs in a different order it will be rejected by the Trading Host.
A trader with a sell order would create the strategy from the buyers perspective and enter an offer.
2 .4.2 Futures and Options Strategy Types
2.4.2.1 Futures
|
Strategy |
Code |
Strategy Definition/Structure |
Pricing |
|
Calendar Spread |
E |
Buy (Sell) one contract in the near month, Sell (Buy) one contract in the far month |
Subtract the price of the back month from that of the front month |
|
Butterfly |
B |
Buy (Sell) one contract in near Calendar month Sell (Buy) two contracts far month, Buy (Sell) one contract in a further dated expiry month. The gaps between the months do not have to be equal/ consecutive |
The combined price of the two products being sold is subtracted from the combined price of the two contracts being bought |
|
Condor |
W |
Buy (Sell) one contract month in the first month of the strategy, sell (Buy) one contract in each of the next two delivery months and Buy (Sell) one product in the fourth month. The gaps between the months do not have to be equal/consecutive |
(Month1 – Month 2) – (Month3 – Month4) |
|
Strip |
M |
The simultaneous purchase (sale) of one or more contracts in four or more quarterly delivery months within a single contract. Any quarterly delivery month can act as the first month of the Strip, as long as there are at least three following months available. Serial months in a product are ignored and cannot form part of a Strip Strategy. The number of lots in each leg can vary. Selling the Strip involves selling all months in the Strip, vice versa for buying |
Calculated from a net change in price between the current trading sessions price and the previous day’s Daily Settlement price. Where a new expiry month is listed, a zero net change in price is to be assumed for this month. |
|
Pack |
O |
Packs consist of four consecutive quarterly months. The first month of the “White” Pack is configurable and although usually the next quarterly month, it can be any month of the next four quarterly months. The number of lots in each leg must be the same. LIFFE CONNECT® currently recognizes five Packs: White Pack /Red Pack /Green Pack /Blue Pack/Gold Pack |
Priced same as Strips above |
|
Bundle |
Y |
Bundles are standardized Strips. The first month of a Bundle is configurable and usually the front quarterly month but it could be any of the quarterly expiries within the next twelve months. The number of lots in each leg must be the same. LIFFE CONNECT® currently recognizes four Bundles: 2 – Year Bundle/3 – Year Bundle/4 – Year Bundle/5 – Year Bundle |
Priced same as Strips above |
|
Reduced Tick Calendar Spreads |
Z |
Buy (Sell) one contract in the near month, Sell (Buy) one contract in the far month Note: The minimum tick size movement will be smaller than that available in other strategies or outright markets. |
Priced the same as Calendar Spread above. |
|
Intercommodity Spreads |
U |
Buy a month in one contract and sell one month in another contract with ratio volume determined at the point of creation. |
Net Change Value= ((Front Leg Price – Front Leg YDSP) – (Back Leg Price – Back Leg YDSP)) / Logical Ratio) |
|
Simple Inter-Commodity Spreads |
Q |
A separate contract that does not list explicit months, but instead allows two separate contracts to be traded against each other without legging risk within a central order book. The SICS products will trade with a volume ratio of 1:1 only. |
SICS strategies require a price for each leg to be specified. The Trading Host will determine the Strategy Net Price (SNP) from these leg prices. |
2.4.2.2 Options
The following table lists the recognized Options strategies that may be traded on LIFFE CONNECT®. The components of an option strategy (whether a buy or sell order) must always be created from the BUY perspective, as defined below:
|
LIFFE CONNECT Strategy Code |
Strategy |
Strategy Definition/Structure (Sequence in which the strategy order must always be entered, irrespective of whether it is a buy or a sell order) |
|
A |
Jelly Roll |
Buy (sell) a reversal in one serial month and sell (buy) the reversal in another serial month to produce a synthetic spread between both months. Sell (buy) call, buy (sell) put at same strike in near month, buy (sell) call, sell (buy) put at same strike in far month (strike price in far month need not equal strike price in near month). |
|
B |
Call Butterfly |
Buy call, sell two calls at higher strikes, buy call at a higher strike (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
|
Put Butterfly |
Buy put, sell two puts at higher strikes, buy put at a higher strike (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
D |
Call Spread* |
Buy call, sell call (same month) at higher strike |
|
|
Put Spread* |
Buy put, sell put (same month) at lower strike |
|
E |
Call Calendar Spread |
Sell near month call, buy far month call (Same strikes across the two months) |
|
|
Put Calendar Spread |
Sell near month put, buy far month put (Same strikes across the two months) |
|
F |
Call Diagonal Calendar Spread |
Sell near month call, buy far month call at a different strike |
|
|
Put Diagonal Calendar Spread |
Sell near month put, buy far month put at a different strike |
|
G |
Guts |
Buy call, buy put at higher strike |
|
H |
2x1 Ratio Call Spread |
Sell call, buy two calls at higher strike |
|
|
2x1 Ratio Put Spread |
Sell put, buy two puts at lower strike |
|
I |
Iron Butterfly |
Buy the straddle, selling Strangle. This must be entered in the following sequence, which equates to the same: Sell put, buy put and call at higher strike, sell a call at an even higher strike (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
J |
Combo |
Sell call, buy put at lower strike |
|
K |
Strangle |
Buy put, buy call at higher strike |
|
L |
Call Ladder |
Buy call, sell call at higher strike, sell call at even higher strike (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
|
Put Ladder |
Sell put, sell put at higher strike, buy put at even higher strike (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
M |
Options Strips |
Comprised of a minimum of 2 and a maximum of 8 outright strikes being either all call or all puts, and a mixture of calls and puts; or An example is to buy a call and put at one strike and buy a call and put at another strike. The premium is added together to form a strip. |
|
N |
Straddle Calendar Spread |
Sell Straddle in near month, buy Straddle in far month at same strike (Sell near month put, sell near month call, buy far put, buy far call) |
|
P |
Diagonal Straddle |
Sell Straddle in near month, buy Straddle in far month at different strike: Sell near month put, sell near month call at the same strike, buy far month put, buy far month call at the same strike |
|
S |
Straddle* |
Buy put, buy call at same strike |
|
W |
Condor |
Buy put (call), sell put (call) at two even higher strikes, buy put (call) at yet higher strike. (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
X |
Box |
Buy call and sell put at a lower strike, buy put and sell call at higher strike. The strike prices of the lower strikes should be the same, the strike price of the higher strikes should be the same. |
|
R |
Synthetic Underlying |
This is a standard conversion/reversal strategy but without the Underlying leg. Reversal: Buy a call, sell a put at the same strike To trade a Conversion the order must be entered in the same sequence as above, but submitted to the market as a sell/offer order |
|
W |
Iron Condor |
Buy (sell) the call spread and also buying (selling) the put spread with lower strikes. Sell (buy) put, buy (sell) put at higher strike, buy (sell) call at even higher strike, sell (buy) call at even higher strike (all series for the same expiry month). |
|
X |
3 – Way: Buy a Call spread versus a Put |
Buy a Call spread versus selling a put: Buy a call, sell a call at a higher strike, sell a put at any strike |
|
Y |
3 – Way: Buy a Put spread versus a Call |
Buy a Put spread versus selling a call: Buy a put, sell a put at a lower strike, sell a call at any strike. |
|
Z |
3 – Way: Straddle versus a Call |
Buy a Straddle versus selling a call: Buy a put and call at the same strike, as well as selling a call at any strike. |
|
Z |
3 – Way: Straddle versus a Put |
Buy a Straddle versus selling a put: Buy the straddle (i.e. Buy a put and call at the same strike), as well as selling a put at any strike. |
|
|
|
|
|
|
|
|
2.4.3.1 Net Premium
The majority of strategies priced on the LIFFE CONNECT system are calculated by “netting” the buy legs against those of the sell leg.
For Futures products the strategy is expressed in terms of the front (nearest to expiry) month first. For example for a calendar spread, buying Jun/Sep means buying Jun to sell Sep. Selling Jun/Sep means selling Jun to buy Sep.
See Appendix Examples: 8.1 Pricing of Strategies Net Premium
When a strategy trade occurs, the counterparty to each trade receives full notification of the traded price of said strategy including the leg price allocations. The Trading Host also sends the following updates to the market as a whole to provide full visibility of trading activity at any time:
· Price Updates
· Volume Updates
2.4.4.1 Price Updates
As in the outright market, when a strategy trades, updates are not only sent to the counterparties of the trade but also the market receives price updates via a Strategy Market Update message. As described in Strategy Leg Pricing (see section 2.4.5), the price for each leg within the strategy is assigned by the Trading Host when the strategy trades.
The Strategy Market Update message distributed to the market therefore includes not only the traded strategy price update but also the traded price for each leg. The strategy type from which it was generated can also be derived from the AMR of the message. For Delta Neutral trading, if the underlying product is listed on the Trading Host, the underlying leg will also be updated.
Note: For strategies which contain ratio legs, more than one price may be traded for a particular leg. Reporting of strategy leg prices are restricted to one price which will always be the worst price to ensure calculation of the strategy traded price from the leg prices will not generate a better price than actually executed.
2.4.4.2 Volume Updates
When a strategy trade occurs the counterparties are naturally notified of the volume executed, at each price, for both the strategy as a whole and each leg. As with the Price Updates the market is also informed of the traded volume details through both the Market Update and Strategy Market Update message:
· Last Traded Volume for strategy market
· Total Traded Volume, for current day, for strategy market
· Last Traded Volume for each leg (outright market) of the strategy
· Total Traded Volume for current day, for each leg (outright market) of the strategy.
2.4.5.1 Overview
While LIFFE CONNECT matches strategies at a single price; the resulting positions are always maintained in the corresponding outright series. This ensures that traders can use either the outright or strategy markets to open and close their positions. Therefore once a strategy trade has been identified, each leg must be allocated a price which is consistent both with the strategy traded and with the current price in the outright market. LIFFE CONNECT uses the following algorithm to determine the price of each outright leg as follows:
- Assign reference price based on Bid / Ask and last trade information in the outright market
- Adjust leg prices to meet strategy price
NOTE: Effective with trade date of Tuesday, January 3, 2006, the CME Clearing House implemented a change to the e-cbot spread leg pricing convention on all reduced tick calendar spreads in Treasury futures.
Specifically, the front leg price of all reduced tick calendar spreads will default to the prior day’s settlement price and the differential price will determine the price of the spread’s back leg. The major benefit to the customer is consistency in leg price assignments.
Beginning with the Monday night e-cbot trading session on January 2, 2006 (trade date January 3), the CME Clearing House automatically adjusted all e-cbot generated spread leg prices based on the prior day’s settlement. Firms must be aware of the following impact and inform their clients accordingly:
For Clearing purposes, leg price assignments for quarter tick spreads in CBOT Treasury products will follow the convention established for open auction markets whereby the front month leg is reset to the previous day’s settlement price and the back month leg is established based on the differential. Firms can use the existing SLED functionality to modify these assigned prices should the customer desire specific prices on the legs. Clearing confirmation messages will contain the front-month price reset to the previous days’ settlement price.
With respect to execution and confirmations, the e-cbot trading host methodology of assigning leg prices (based on the most current price) will not change. As a result, order confirmation messages back to the front-end ISV will continue to report the prices prevailing in the front month at the time of execution. Firms should review their internal system to determine what values are utilized in their systems that match off executions with clearing data.
2.4.6 Implied Strategies
LIFFE CONNECT® offers an implied strategy trading facility for selected strategies.
There are two different ways of processing strategy orders at the Client Application level:
· Implying ‘In’ orders, which build contingent strategy orders from existing outright orders;
· Implying ‘Out’ orders, which build contingent outright orders from existing strategy and outright orders.
The prices of orders submitted in the relevant outright legs will be used by the Trading Host to generate implied-in prices. Where these implied-in prices represent the best price for a strategy, they may be traded subject to the trading priority.
An implied-out price will be generated in an outright leg from the interaction of an order in an explicit strategy market and an order in one of the relevant outright legs. Where the Trading Host generated implied-out price represents a better price than that available in the outright leg, that order may be traded subject to the trading priority provided the other leg of the explicit strategy can still be traded at the same time.
Where the “implied out” price is better than the price of other orders in the relevant outright leg, the “implied out” price and volume will be disseminated to Quote Vendors via the Market Data Interface (MDI). Where the “implied out” price is equal to the price of other orders in the relevant expiry month, the total volume of all orders at that price will be disseminated. This will mirror the dissemination of “implied out” prices and volumes on LIFFE CONNECT.
Although the Trading Host will generate both implied-in and implied-out prices, only implied-out prices and only those which represent the current best market price will be distributed via the LIFFE CONNECT® API. Display of implied prices will be dependent upon the type of Independent Software Vendor (ISV) or member firm developed client trading application used. No chaining occurs i.e. implieds are not derived from other implieds. Implied prices are used in the uncrossing algorithm but are not used in Indicative Opening Price (IOP) calculation during Pre-Open.
2.4.6.1 Types of Implieds
The Trading Host can generate implied prices for the following futures and options strategies:
|
Implied strategy set at product level |
Configured on |
Configured off |
|
Options Call & Put spreads |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Options Call & Put Calendar spreads |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Options Call & Put Diagonal Calendar spreads |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Options Straddles |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Options Strangles |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Futures Calendar spreads |
Implied in and out prices generated. Implied out prices published |
No implied prices calculated or published |
|
Futures Butterflies spreads |
Implied in prices calculated but are not published |
No implied prices calculated or published |
|
Futures Strip spreads |
Implied in prices (where the volume is quoted in terms of a 1 lot on each leg) calculated but are not published. Any other volume ratio will not generate implied prices |
No implied prices calculated or published |
|
Futures Pack spreads |
Implied in prices calculated but are not published |
No implied prices calculated or published |
|
Futures Bundle spreads |
Implied in prices calculated but are not published |
No implied prices calculated or published
|
|
Futures Condor spreads |
Implied in prices calculated but are not published |
No implied prices calculated or published |
2.4.6.2 Implied Pricing Table for e-cbot Products
|
Product |
Symbol |
Implied Enabled |
|
Dow Jones AIG Commodity Index Excess Return |
ER |
No |
|
Mini-Gold Futures |
YG |
Yes |
|
Mini-Silver Futures |
YI |
Yes |
|
Corn Futures |
ZC |
Yes |
|
Mini-Sized Corn Futures |
XC |
Yes |
|
Ethanol Futures |
ZE |
Yes |
|
100 oz. Gold Futures |
ZG |
Yes |
|
5000 oz. Silver Futures |
ZI |
Yes |
|
South American Soybean Futures |
ZK |
Yes |
|
Soybean Oil Futures |
ZL |
Yes |
|
Soybean Meal Futures |
ZM |
Yes |
|
Oat Futures |
ZO |
Yes |
|
Rough Rice Futures |
ZR |
Yes |
|
Soybean Futures |
ZS |
Yes |
|
Mini-Sized Soybean Futures |
XB |
Yes |
|
Wheat Futures |
ZW |
Yes |
|
Mini-Sized Wheat Futures |
XW |
Yes |
|
|
|
|
|
BIG Dow DJIA ($25) Futures |
DD |
No |
|
mini-sized Dow ($5) Futures |
YM |
No |
|
DJIA ($10) Futures |
ZD |
No |
|
Dow Jones US Real Estate Index |
RE |
No |
|
|
|
|
|
5 Year Interest Rate Swap Futures |
SA |
No |
|
10 Year Interest Rate Swap Futures |
SR |
No |
|
30 Year Interest Rate Swap Futures |
QS |
No |
|
mini-sized Eurodollar Futures |
YE |
Yes |
|
30 Year Treasury Bond Futures |
ZB |
No |
|
5 Year U.S. Treasury Notes Futures |
ZF |
No |
|
10 Year U.S. Treasury Notes Futures |
ZN |
No |
|
30 Day Federal Funds Futures |
ZQ |
Yes |
|
2 Year U.S. Treasury Notes Futures |
ZT |
No |
Options contract do not have implied pricing enabled.
2.4.7 Reduced Tick Spreads
LIFFE CONNECT will allow Reduced Tick Spread calendar spreads in addition to normal calendar spreads within the same product.
For example, the outright months and strategy markets in one product will trade in 1/32, while the reduced tick spread market will trade in ¼ of 1/32.
The Reduced Tick Calendar spread markets will function in much the same way as a normal Calendar Spread markets on the LIFFE CONNECT platform. Traders subscribed to the physical commodity will receive notification of new Reduced Tick calendar spreads being created and, should they trade, they will also receive notification of the last traded price and volume. This will include the leg prices and volumes, all without having to explicitly subscribe to the new contract. Reduced Tick Spread markets will have a recognized strategy code of ‘Z’.
Reduced tick spread products:
· US Treasury Bond Futures
· 10 Year Treasury Note Futures
· 5 Year Treasury Note Futures
· 2 Year Treasury Note Futures
· 10 Year Interest Rate Swap Futures
· 5 Year Interest Rate Swap Futures
· mini-sized Dow and Big Dow *
* Reduced Tick Calendar Spreads for mini-sized Dow and Big Dow do not actually trade in reduced ticks, but use Strategy Code Z to enable Single Line Entry Differential Spread (SLEDS) pricing.
Reduced tick spreads will:
· Send volume updates for trades to the outright legs
· Trade in the same denominator as the other strategies and outrights
· Reference to legs for the calculation of the strategy leg prices
· Use a different price format from that used in the other strategies and outright months
Reduced tick spreads will not:
· Support implied in and out prices
· Update traded leg prices in the respective outright months
· Settle in a tick size less than the outright markets
Inter Commodity Spreads (ICS) are separate listed contracts on e-cbot. Both legs of an ICS will be futures contracts that have no interaction with the outright leg markets.
Features of Inter Commodity Spreads include:
· No legging risk
· Spread trading using ratios
· Pricing relative to the previous day’s settlement price
· Expiry months of legs and ratio chosen by strategy creator
2.4.8.1 Creation of an ICS Market
There will be no automatically created strategy within an ICS contract. Therefore, before any trading can take place within an ICS contract a market will need to be explicitly created by a trader. ICS markets are not available in Pre-Open.
Good Till Cancelled (GTC) orders are not permitted in ICS markets. Therefore no ICS markets will be created during Trading Host start-up when GTC orders are loaded.
For Inter Commodity Spreads the concept of fractional ratios will be supported. Instead of specifying ratios for each leg such as 5:3 the ratio of the front leg only will be specified. (The logical ratio for the back leg of an ICS market will always be -1, to indicate the selling position.)
It will be possible to specify this ratio down to 4 decimal places. For example, if a trader wished to trade a ratio of 5:3 the logical ratio of the front leg will be specified as 1.6667. This would mean that for every 1.6667 lots traded in the front leg of the ICS, 1 lot should be traded in the back leg.
2.4.8.2 Subscriptions
To receive notifications of a new ICS market being created and any market updates for ICS strategies a trader must be subscribed to the ICS contract. Traders who have subscribed to either, or both, legs of an ICS market will not automatically receive any information regarding the ICS market.
2.4.8.3 Required Order Parameters
Required ICS order parameters include the Delivery Months, Quantity, Leg Prices, and Ratio along with the standard order parameters of CTI, Origin, Account, e-cbot User ID, etc.
How to Enter a NOB Order Example
Entering an order to buy 1000 Sep05 NOBs at a ratio of 1.7100:
|
ZN Sep05 |
|
ZB Sep05 |
|
1000 |
585 |
|
|
10813 |
10513 |
|
|
|
1.7100 |
|
The ZB quantity is derived by dividing the NOB quantity by the ratio and rounding to the nearest whole number.
1000/1.71 = 584.79 (rounded to 585)
2.4.8.4 Daily Price Limits
Daily Price Limit configuration will be derived from the underlying legs of the ICS strategy.
2.4.8.5 ICS Order Revision
The volume of resting ICS orders can be revised but the price of a resting ICS order cannot be changed.
2.4.8.6 Net Change Value
The Net Change Value is the net change in price from previous days settlement price (expressed in 32nds). ISV and Client developed trading applications will be able to calculate and display this value.
Net Change =
((Front Leg Price – Front Leg YDSP) –
(Back Leg Price – Back Leg YDSP)) / Logical Ratio)
Net Change Value Example
ZN Sep05 YDSP = 108 13/32
ZB Sep05 YDSP = 105 13/32
ZN Sep05 Requested Price = 108 27/32
ZB Sep05 Requested Price = 105 30/32
Net Change Value (Value of NOB) = (108 27/32 – 108 13/32) – ((105 30/32 – 105 13/32)/1.7100)
=14/32 – ((17/32)/1.7100)
=14/32 – 9.9415/32
=4.0585/32 (Strength of NOB with value in 32nds)
|
Bid Size |
Bid Price |
Ask Price |
Ask Size |
|
1000 |
+4.0585 |
|
|
2.4.8.7 Potential ISV Trading Application Market View for NOB
The following table is an example of how an ISV or client developed trading application could display the NOB market for ratios of 1.6755, 1.6900, and 1.7100.
|
Strategy |
Bid Size |
Bid Price |
Ask Price |
Ask Size |
|
NOB(U).ZNSep05.ZBSep05. 1.6755 |
1500 |
-1.2500 |
0 |
1000 |
|
NOB(U).ZNSep05.ZBSep05. 1.6900 |
500 |
-1.0000 |
+0.7500 |
100 |
|
NOB(U).ZNDec05.ZBSep05. 1.7100 |
50 |
-1.3750 |
-0.7575 |
1500 |
2.4.8.8 Partial Fills (1.71 Ratio)
The following table illustrates how partial fills would occur with a 1.71 ICS ratio.
|
Resting Order Volume |
Incoming Order (Front Leg Volume) |
Calculated Back Leg Volume |
Cum. Front Leg Traded |
Cum. Back Leg Traded |
|
100 |
0 |
0 |
0 |
0 |
|
80 |
20 |
11 |
20 |
11 |
|
60 |
20 |
12 |
40 |
23 |
|
40 |
20 |
11 |
60 |
34 |
|
20 |
20 |
12 |
80 |
46 |
|
0 |
20 |
12 |
100 |
58 |
2.4.8.9 ICS Trade Reporting
· Clearing receives trade confirmations for the outright legs and the corresponding leg prices
· Bought 1000 ZN Sep05 at price of 108 13/32
· Sold 585 ZB Sep05 at price of 105 13/32
2.4.8.10 ICS Symbols and Products
|
Symbols |
Products |
|
ZFA |
5 -Yr Treasury Note Futures vs 5 - Yr Swap Futures (5-Yr TED) |
|
ZFB |
5-Yr Treasury Note Futures vs 30 - Yr Treasury Bond Futures (FOB) |
|
ZFN |
5 - Yr Treasury Note Futures vs 10 - Yr Treasury Note Futures (FIT) |
|
ZNB |
10 - Yr Treasury Note Futures vs 30 - Yr Treasury Bond Futures (NOB) |
|
ZNR |
10 - Yr Treasury Note Futures vs 10 -Yr Swap Futures (10-Yr TED) |
|
ZTB |
2 - Yr Treasury Note Futures vs 30 - Yr Treasury Bond Futures (TUB) |
|
ZTN |
2 - Yr Treasury Note Futures vs 10 - Yr Treasury Note Futures (TUT) |
|
ZTF |
2 - Yr Treasury Note Futures vs 5 - Yr Treasury Note Futures (TUF) |
|
ZUB |
Municipal Bond Index Futures vs 30 - Yr Treasury Bond Futures (MOB) |
2.4.9 Delta Neutral Strategies
LIFFE CONNECT supports the functionality to perform delta neutral (volatility) trades i.e. to trade simultaneously an options product with either an Exchange listed or non-Exchange listed cash product. The following are examples of possible volatility trades:
· An individual equity option AND the underlying stock. Validation of the underlying stock price is not currently supported on LIFFE CONNECT.
· An Exchange listed option (individual, index or strategy) AND the Exchange listed future.
· A LIFFE CONNECT recognized options strategy AND the underlying stock.
This allows traders to hedge an option position using the related underlying. An example of this functionality is described for equity options below (the procedure is similar for futures).
LIFFE CONNECT can be configured to:
· Report the cash leg of an equity options volatility trade to the cash market in real time.
· Validate the cash leg price of the volatility order upon submission and trade to ensure that it is within an allowable spread of the current market mid-point.
· Map different options codes to the cash market codes for the same product.
· Where applicable, allow an Alternate Underlying contract, for example options on CBOT® Dow Jones Industrial AverageSM against either the CBOT® DJIA and CBOT® mini-sized Dow Futures
· Account for different contract sizes between the option and its underlying to ensure a delta neutral position
2.4.9.1 Rules for the Underlying Futures Leg
Creation of volatility market
In addition to variable underlying values and contracts the delta neutral trading functionality also enables configuration of the underling leg by months, price, and delta when the Delta neutral strategy is created.
Traders can choose the delta value for delta neutral orders submitted. The volume of the underlying leg is calculated by the Trading Host based on the submitted delta. The futures leg price and volume is reported to the market with a tag to denote it is a delta neutral trade. However unlike other strategy trades, the underlying leg will not update the total traded volume of that market.
2.4.10 Delta Neutral Strategy Types
|
LIFFE CONNECT Strategy Code |
Strategy |
Strategy Definition/Structure (Sequence in which the strategy order must always be entered, irrespective of whether it is a buy or a sell order) |
|
V |
Call Volatility Trade |
Buy call, sell Underlying to give zero net delta |
|
V |
Put Volatility Trade |
Buy put, buy Underlying to give zero net delta |
|
D |
Call Spread versus Underlying |
Buy call, sell call at higher strike, sell the Underlying |
|
D |
Put Spread versus Underlying |
Buy put, sell put at lower strike, buy the Underlying |
|
S |
Straddle versus buying Underlying |
Buy put, buy call at same strike, buy the Underlying |
|
S |
Straddle versus selling Underlying |
Buy put, buy call at same strike, sell the Underlying |
|
C |
Call Spread versus sell Put versus Underlying |
Buy a Call spread versus selling a put versus selling the Underlying: Buy a call, sell a call at a higher strike, sell a put at any strike, selling the Underlying. |
|
P |
Put Spread versus sell Call versus Underlying |
Buy Put spread versus selling a call versus buying the Underlying: Buy a put, sell a put at a lower strike, sell a call at any strike, buy the Underlying |
|
A |
Call Ladder versus buying Underlying |
Buy call, sell call at higher strike, sell call at even higher strike, buy the Underlying |
|
A |
Call Ladder versus selling Underlying |
Buy call, sell call at higher strike, sell call at even higher strike, sell the Underlying |
|
A |
Put Ladder versus buying Underlying |
Sell Put, sell Put at higher strike, buy put at even higher strike, buy the Underlying |
|
A |
Put Ladder versus selling Underlying |
Sell put, sell put at higher strike, buy put at even higher strike, sell the Underlying |
|
J |
Combo versus buying Underlying |
Sell call, buy a put at a lower strike, buy Underlying |
|
E |
Call Calendar Spread versus buying Underlying |
Sell near month call, buy far month call (same strike across the two months), buy the Underlying. |
|
E |
Call Calendar Spread versus selling Underlying |
Sell near month call, buy far month call (same strike across the two months), sell the Underlying |
|
E |
Put Calendar Spread versus buying Underlying |
Sell near month call, buy far month put (same strikes across the two months), sell the Underlying |
|
E |
Put Calendar Spread versus selling Underlying |
Sell near month put, buy far month put (same strikes across the two months), sell the Underlying |
|
H |
2 by 1 Ratio Call Spread versus buying Underlying |
Sell call, buy two calls at higher strike, buy the Underlying |
|
H |
2 by 1 Ratio Call Spread versus selling Underlying |
Sell call, buy two calls at higher strike, sell the Underlying |
|
H |
2 by 1 Ratio Put Spread versus buying Underlying |
Sell put, buy two puts at lower strike, buy the Underlying |
|
H |
2 by 1 Ratio Put Spread versus selling Underlying |
Sell put, buy two puts at lower strike, sell the Underlying |
|
R |
Reversal /Conversion (Synthetic) |
Reversal: Buy call, sell put at same strike, sell Underlying To trade a ‘conversion’ the order must be entered in the same sequence as above, but submitted to the market as a Sell/Offer order. |
|
T |
Call Condor versus buying underlying |
Buy a call. Sell a call at a higher strike with the same expiry month. Sell a call at an even higher strike with the same expiry month. Buy a call at an even higher strike with the same expiry month and buy the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
T |
Call Condor versus selling underlying |
Buy a call. Sell a call at a higher strike with the same expiry month. Sell a call at an even higher strike with the same expiry month. Buy a call at an even higher strike with the same expiry month and sell the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
T |
Put Condor versus buying underlying |
Buy a put. Sell a put at a higher strike with the same expiry month. Sell a put at an even higher strike with the same expiry month. Buy a put at an even higher strike with the same expiry month and buy the underlying. (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
T |
Put Condor versus selling underlying |
Buy a put. Sell a put at a higher strike with the same expiry month. Sell a put at an even higher strike with the same expiry month. Buy a put at an even higher strike with the same expiry month and sell the underlying. (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
V |
Iron Condor versus buying underlying |
Buy the call spread and also buy the put spread with lower strikes and buy the underlying Sell put, buy put at higher strike, buy call at even higher strike, sell call at even higher strike and buy the underlying (all series for the same expiry month) |
|
V |
Iron Condor versus selling underlying |
Buy the call spread and also buy the put spread with lower strikes and sell the underlying Sell put, buy put at higher strike, buy call at even higher strike, sell call at even higher strike and sell the underlying (all series for the same expiry month) |
|
B |
Call Butterfly versus buying underlying |
Buy call, sell two calls at higher strikes in the same expiry month, buy call at a higher strike in the same expiry month, buy the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
B |
Call Butterfly versus selling underlying |
Buy call, sell two calls at higher strikes, buy call at a higher strike, sell the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
B |
Put Butterfly versus buying underlying |
Buy put, sell two puts at higher strikes in the same expiry month, buy put at a higher strike in the same expiry month, buy the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
B |
Put Butterfly versus selling underlying |
Buy put, sell two puts at higher strikes, buy put at a higher strike, sell the underlying (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
F |
Call Diagonal Calendar Spread versus buying underlying |
Sell near month call, buy far month call at a different strike and buy the underlying |
|
F |
Call Diagonal Calendar Spread versus selling underlying |
Sell near month call, buy far month call at a different strike and sell the underlying |
|
F |
Put Diagonal Calendar Spread versus buying underlying |
Sell near month put, buy far month put at a different strike and buy the underlying |
|
F |
Put Diagonal Calendar Spread versus selling underlying |
Sell near month put, buy far month put at a different strike and sell the underlying |
|
G |
Guts versus buying underlying |
Buy call, buy put at higher strike and the same expiry month and buy the underlying |
|
G |
Guts versus selling underlying |
Buy call, buy put at higher strike and the same expiry month and sell the underlying |
|
I |
Iron Butterfly versus buying underlying |
Buy the straddle, sell the Strangle and buy the underlying. This must be entered in the following sequence, which equates to the same: Sell put, buy put and call at higher strike in the same expiry month, sell a call at an even higher strike in the same expiry month and buy the underlying. (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
I |
Iron Butterfly versus selling underlying |
Buy the straddle, sell the Strangle and sell the underlying. This must be entered in the following sequence, which equates to the same: Sell put, buy put and call at higher strike in same expiry month, sell a call at an even higher strike in the same expiry month and sell the underlying. (The strikes do not have to be consecutive and the gaps between them do not have to be equal) |
|
K |
Strangle versus buying underlying |
Buy put, buy call at higher strike, buy the underlying |
|
K |
Strangle versus selling underlying |
Buy put, buy call at higher strike, sell the underlying |
|
N |
Straddle Calendar Spread versus buying underlying |
Sell Straddle in near month, buy Straddle in far month at same strike and buy the underlying (Sell near month put, sell near month call, buy far put, buy far call) |
|
N |
Straddle Calendar Spread versus selling underlying |
Sell Straddle in near month, buy Straddle in far month at same strike and sell the underlying (Sell near month put, sell near month call, buy far put, buy far call) |
|
Q |
Diagonal Straddle Calendar Spread versus buying underlying |
Sell Straddle in near month, buy Straddle in far month in different strike and buy the underlying: Sell near month put, sell near month call at the same strike, buy far month put at a different strike, buy far month call at the same strike and buy the underlying |
|
Q |
Diagonal Straddle Calendar Spread versus selling underlying |
Sell Straddle in near month, buy Straddle in far month at different strike and sell the underlying: Sell near month put, sell near month call at the same strike, buy far month put at a different strike, buy far month call at the same strike and sell the underlying |
See Appendix Example: 8.2 Delta Neutral Strategies
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