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Options price limits are dynamic and are produced for both outright options and strategy markets by the Options Pricing system.

3 .5.1.1                Delta Limits

Using a similar principle to price limits, LIFFE CONNECT^® will validate delta neutral trades to ensure that the requested delta for a trade is acceptable. The Trading Host will only allow the creation of volatility strategies where the specified delta falls within these delta limits.

As with price limits, delta limits are calculated using a reference value and defined spreads. The reference delta for every strike of a particular option product is calculated by the Options Pricing system and sent to the Trading Host.

When more than one option leg exists in a delta neutral strategy the reference delta of each leg is combined to form an overall strategy delta that is validated against delta limits. The deltas for sell call legs and buy put legs are added to form overall figure and the deltas for buy call legs and sell put legs are subtracted from it. This overall delta is validated against delta limits and the trade is accepted or rejected.

Example 1: Delta Limits

Assume that a trader enters a volatility trade with a delta of 39%, the current reference delta is 34.87% and the current delta limit is 10%. The delta validation permits the strategy to be created because the requested delta is between 24.87% and 44.87%. Strategies created with a delta outside this range will be rejected by the Trading Host. Similarly prices submitted into a previously created strategy where the delta is no longer within the range will also be rejected.

Example 2: Strategy Delta Limits

For example, assume that a trader enters a straddle volatility order with delta of 14%. The current reference delta is 42.16% in the put option leg and 24.51% in the Call option leg and the delta limits are set at 10%.

Since the legs of a straddle are buy Put, buy Call, the overall strategy reference delta is 42.16 – 24.51 = 17.65%. Since the delta of the order is between 7.65% and 27.65% it will be accepted.

Both the upper and lower delta limits are always the same sign as the reference delta. For instance, if the reference delta for a trade is 4.37% and the delta spread is 10%, then the delta limits will be 0.01% and 14.37%.

3.5.1.2                Underlying Volatility Limits

This corresponds to the maximum deviation allowed on the underlying last traded price in delta neutral trades. It follows the same principal as delta limits.

Example 1: Underlying Volatility Limits

Assume the last traded CBOT DJIA^SM futures price is 9730 and the Underlying Volatility limits are set to 10 pts. Orders with futures legs outside the range of 9710 and 9740 will be rejected by the Trading Host.