Ppt On Technical Analysis Of Stock Market Order Flow Binary Options Trading
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The disclosed embodiments relate to systems and methods for triangulation of options and futures. An exchange receives a volatility quoted order. The system attempts to match the order within a volatility order book.
If there is a match, the system attempts to mitigate the risk of the order by implying an order into the futures market. If there is not a match, the system implies an order into a premium quoted option order book.
The exchange automatically maintains the order based on changes in the underlying futures market and a stored quoting model. This application claims the benefit of the filing date under 35 U. Futures is a term used to designate all contracts for the purchase or sale of financial instruments or physical commodities for future delivery or cash settlement on a commodity futures binary gps protocol best books for futures and options trading.
A futures contract is a legally binding agreement to buy or sell a commodity at a specified price at a predetermined future time, referred to as the expiration date or expiration month. An option is the right, but not the obligation, to sell or buy the underlying instrument in this case, a futures contract at a specified price within a specified time. The clearing house is an adjunct to the Exchange, and may be an operating division thereof, which is responsible for settling trading accounts, clearing trades, collecting and maintaining performance bond funds, regulating delivery, and reporting trading data.
The essential role of the clearing house is to mitigate credit risk. Clearing is the procedure through which the Clearing House becomes buyer to each seller of a futures contract, and seller to each buyer, also referred to as a novation, and assumes responsibility for protecting buyers and sellers from financial loss due to breach of contract, by assuring performance on each contract.
A clearing member is a firm qualified to clear trades through the Clearing House. Current financial instrument trading systems allow customers to submit orders and receive confirmations, market data, and other information electronically via a network. Electronic trading systems may offer a more efficient and transparent system of trading. Electronic trading systems may achieve more fair and equitable matching among traders as well as identify more opportunities to trade, thereby improving market liquidity.
Customers such as market makers may place hundreds to thousands of orders with the Exchange covering multiple strikes for an instrument. These orders are generated by the customer, using data models which are based on market data, and transmitted to the exchange quoting premiums.
When the market changes, some or all of these orders may need to be recalculated and updated, typically all at once or in as little time as possible, by, for example, sending in order modifications or cancellations to the exchange. The flood of information is taxing on the exchange hardware and also on customer's equipment as it may involve thousands to millions of message per second back and forth throughout a day. The disclosed embodiments allow for market participants to quote an order for an options contract in implied volatility, as opposed to quoting by premium, and have the order implied into both the futures market and the premium quoted options market.
In existing systems, quotes may be received separately for each book and matched separately. Drawbacks in existing systems include massive communication bursts that degrade performance both on the exchange and customer sides, a lack of liquidity in certain markets, and the inability to satisfy mitigation possibilities. Triangulation solves these issues by moving part of the modeling to the exchange side, providing built-in mitigation, and increasing liquidity between the different books.
In particular, the disclosed embodiments relate to triangulation between futures, premium option, and volatility order books allowing incoming orders to trade across all three books. Triangulation allows for orders to quickly and efficiently imply between the books increasing market liquidity. The disclosed embodiments further relate to storing a customer's model and using the model to update the order books based on the movement of the futures market; using the model saves time, communication bandwidth, and computing power.
Triangulation further provides automatic mitigation for volatility priced orders through automatic implication in the futures market. A central limit order book CLOB may binary gps protocol best books for futures and options trading a specialized order book that that matches customer orders e. A CLOB may maintain a stack ala resting orders in that a customer can see multiple orders for and pricing for each product.
For each instrument offered by the exchange, there may exist these CLOBs among others. In existing systems, each CLOB may be managed individually. Each of the books are matched by a matching engine separately. For example, a product may be quoted using different pricing models or schemes. A customer may prefer to evaluate and quote an instrument using different mechanisms or models.
Two popular quoting mechanisms are premiums and volatility. A premium may be the price paid to acquire the option. Binary gps protocol best books for futures and options trading may also be referred to as the option price. Option prices are considered premiums because the options binary gps protocol best books for futures and options trading have no underlying value. The components of an option premium include its intrinsic value, its time value and the implied volatility of the underlying asset.
The strike price may be defined as the price at which the holder of an options can buy in the case of a call option or sell in the case of a put option the underlying product when the option may be exercised. The strike price may also be referred to as the exercise price. Volatility may be a statistical measurement of the degree of fluctuation of a market or security. Implied volatility may be the volatility as implied by the market price of the option.
The implied volatility may be calculated using an option pricing model, such as the Black model, in which a mathematical relationship between the volatility of the underlying security and the price of its options has been established. Implied volatility may be the market's opinion of the volatility of the option's underlying security.
Using volatility, the price of the underlying security, the market price of the option, the strike price of the option, the expiration date of the option, the interest rate, if applicable, and the dividend yield, if applicable, the premium price may be determine. Implied volatility and premiums are related through use of options pricing models. For example, using a pricing model, the implied volatility of an option may be backed out of the price of the option.
Models such as Black, Black-Scholes, Whaley, Bjerksund, Merton, or customized models allow a trader or exchange to use implied volatility to evaluate an options price or vice versa. Each customer, however, may use a different model to calculate volatility. Black is used to calculate a theoretical call price ignoring dividends paid during the life of the option using the five key determinants of an option's price: The original formula for calculating the theoretical option price OP is as follows:.
The options pricing model may be solved for each variable. For example, a trader may start knowing the other variables and inputting a volatility to compute the premium. Likewise, the variables of an options pricing model may be known time to expiration, strike, price, interest rates except for the volatility that the option is pricing in.
Volatility may be backed out to understand the relative value of the option's price. As such, volatility is a particularly preferred method for quoting options. A customer may calculate volatility using a proprietary equation and then submit an order quoting the implied volatility. This has many benefits, a key one being that since volatility is a measure of change over time, small movements in the market do not effect it as much as premiums. One of the downsides of using premium quoted options binary gps protocol best books for futures and options trading be that as the FUT prices changes, the modeled option price OP may also change frequently.
Premiums are directly related to the FUT price see Black model above. Each time the FUT price ticks up or down this happens constantlythe premiums may be adjusted ever so slightly. Customers that re-calculate their quotes as the FUT price moves may have to adjust each order. For single orders this may not be a major issue as an exchange system may be setup to handle adjustments to orders. However, for every instrument, there may be 10,or s of strikes. A market maker may quote thousands of strike prices for each instrument.
If and when the futures price ticks up or down, each and every single order would have to be recalculated and binary gps protocol best books for futures and options trading for each instrument, for each market maker. The volume of communications and messages may overload even a large pipeline.
Implied volatility, however, changes less frequency than pricing. Large swings in the FUT price may affect volatility, but smaller ticks up and down may not. As such, quoting in volatility allows for fewer communications to be sent back and forth between traders and the exchange.
An order may be quoted in volatility and be valid for a length of time even while the futures market changes. Although volatility quoted orders offer may benefits, some customers may always binary gps protocol best books for futures and options trading to quote in premiums. As such, it may be preferable to maintain an active premium quoted market.
As mentioned above, small changes in the FUT market may adjust the option price. It may be taxing for the customer to continuously adjust their premium quotes. In certain embodiments, a customer may supply an options pricing model to the exchange. The exchange stores and binary gps protocol best books for futures and options trading the model locally as the FUT price changes.
Instead of having the customer re-quote each order, the exchange may use the model to calculate the premiums. As the FUT price changes, the implied quotes may be constantly re-quoted.
This may be another benefit of triangulation with the FUT market. Locking the Futures market when these orders are being calculated and re-quoted may allow for the exchange to recalculate the quotes without the underlying variables changing during the calculation.
Additionally, because this may be done within the exchange environment, there may be less of need to receive and produce the massive amounts of communications that are present in existing systems. Volatility quoted options are conventionally hedged. As with most transactions, volatility quoted orders carry risk. For example, for a naked call, the theoretical risk may be infinite.
The customer may be responsible for the difference between the strike price and the amount the instrument moves above this price. Because there is not a limit to how high a price can trade, the potential loss may be infinite. In order to protect themselves, traders may generally always hedge orders by using an opposite-side-of-the-market futures trade.
Together, the option and the future comprise a delta-neutral option-future combination. In existing systems, the futures order may be entered separately from the volatility quoted order. Certain embodiment including triangulation with the futures market allow the hedge binary gps protocol best books for futures and options trading to proceed automatically. When an order is quoted in volatility, the order may also be implied into the futures market.
In certain embodiments, the system allows traders to place binary gps protocol best books for futures and options trading to trade options contracts by specifying those orders based on volatility or on price.
The orders are trading against separate order books with separate match engines, for example a VQO book and a PQO book. Hedging, via implication, into the underlying Futures order book may also be provided to automatically trade the requisite futures contracts to hedge a particular options trade. When trading options contracts by volatility, a trader may provide their quoting model to the exchange.