Beginning March 21, 2016, the Chicago Board Options Exchange® (CBOE®) starts offering FLEX® index options with Asian and Cliquet style settlement.
FLexible EXchange (FLEX) options, created by CBOE in 1993, are customizable options that allow users to define various contract terms such as exercise style, strike price and expiration date. FLEX options also give investors the opportunity to trade on a larger scale with expanded or eliminated position limits.
Insurance companies that write indexed annuity contracts often have exotic option liabilities embedded within those annuity contracts. Two common types of exotic options are Asians and Cliquets. Insurance companies seeking to hedge embedded exotic option risk have historically traded exclusively in the over-the-counter (OTC) market. The introduction of Asian and Cliquet FLEX index options is expected to provide insurers with an alternative hedging tool to OTC market products, while also providing traditional exchange-traded benefits like enhanced price discovery, transparency and centralized clearing.
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.
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.
Both Asian and Cliquet FLEX index options have a term of approximately one year with 12 monthly observation dates, but each contract type has a different method for determining the exercise settlement value. For additional information on contract specifications, see the “Asian and Cliquet Style Settlement for FLEX Index Options” reference guide on the CBOE website.
Data Sources: CBOE | Effective Date: March 21, 2016