Options Spreads and Combinations

Transcription

1 Options Spreads and Combinations This ic explains: Exchange Recognized Options Spread and Combination Types Exchange Unrecognized Spread and Combination Types UDS Covered Options Delta Delta Neutrality Expiration Valid Instruments Options spread and combination instruments are user defined and identified as either exchange recognized or exchange unrecognized. an options spread is comprised of either all calls or all puts an options combination is comprised of both calls and puts An exchange recognized options spread is a known, historically traded options spread configuration; for example, the butterfly spread represents buy 1 sell 2 buy 1 of the given instrument at a defined strike interval and identical expiration. An exchange recognized spread type submitted for creation by CME Globex platform is acknowledged and disseminated as such in the market data Security Definition message. All options spread and combination types are available for all options products on CME Globex with some exceptions, for example: Option Strip Spread (GD) - energy options only Conditional Curve (CC) - Eurodollar options only Reduced Tick Inter-Commodity Option Spread (EO) - natural gas options only An unrecognized spread or combination type does not conform to any known instrument configuration and is acknowledged and disseminated as 'Generic' (GN) in the market data Security Definition message. For additional information, see User Defined Spread - UDS. Exchange Recognized Options Spread and Combination Types The following list provides the composition of each exchange recognized options spread and combination type: Options - Calendar Horizontal (HO) Options - Calendar Diagonal (DG) Options - Straddle (ST) Options - Strangle (SG) Options - Vertical (VT) Options - Box (BX) Options - Butterfly (BO) Options - Conditional Curve (CC) Options - Condor (CO) Options - Double (DB) Options - Horizontal Straddle (HS) Options - Iron Condor (IC) Options - Ratio 1x2 (12) Options - Ratio 1x3 (13) Options - Ratio 2x3 (23) Options - Strip (SR) Options - Risk Reversal (RR) GD Strip Spread Options - Xmas Tree (XT) Options - 3-Way (3W) Options - 3-Way Straddle versus Call (3C) Options - 3-Way Straddle versus Put (3P) Options - Iron Butterfly (IB) Options - Jelly Roll (JR) Options - Guts (GT) SA Strip CV Covered Options - Reduced Tick Inter-Commodity Option Spread (EO) 1

2 Options - Calendar Horizontal (HO) A horizontal (HO) options spread consists of buying a call (put) at a strike in the far month, and selling a call (put) at the same strike in the near month. Spread ratio: (Buy 1: Sell 1) Call Horizontal Construction: Buy1callstrike1exp1 Sell1callstrike1exp2 Security Definition Example: UD:CY: HO Example: Call Horizontal Buy 1 December 2018 Corn 600 Call and Sell 1 July 2018 Corn 600 Call Put Horizontal Construction: Buy1putstrike1exp1 Sell1putstrike1exp2 Example: Put Horizontal Buy 1 December 2018 Corn 600 Put and Sell 1 July 2018 Corn 600 Put Options - Calendar Diagonal (DG) A Diagonal (DG) options spread consists of buying a call (put) in the deferred month expiration and selling a call (put) in the near month expiration at a different strike price. Spread ratio: (Buy 1: Sell 1) Security Definition Example: UD:CY: DG Call Diagonal Construction: Buy1callstrike1exp1 Sell1callstrike2exp2 Example: Call Diagonal (DG) Buy 1 December 2018 Corn 600 Call and Sell 1 July 2018 Corn 650 Call Put Diagonal Construction: Buy1putstrike1exp1 Sell1putstrike2exp2 Example: Put Diagonal (DG) Buy 1 December 2018 Corn 600 Put and Sell 1 July 2018 Corn 650 Put Options - Straddle (ST) A Straddle (ST) options combination consists of buying both a call and put option on the same instrument, strike price and expiration date. Spread ratio: (Buy 1: Buy 1) Security Definition Example: UD:U$: ST Construction: Buy1callstrike1exp1 Buy1putstrike1exp1 Example: Buy the Straddle Buy 1 December 2018 Eurodollar 9800 Call and Buy 1 December 2018 Eurodollar 9800 Put 2

3 Options - Strangle (SG) A Strangle (SG) options combination consists of buying a put at a lower strike price and buying a call at a higher strike price within the same instrument and expiration. Spread ratio: (Buy 1: Buy1) Security Definition Example: UD:U$: SG Construction: Buy1putstrike1exp1 Buy1callstrike2exp1 Example: Buy the Strangle Buy 1 December 2018 Eurodollar 9800 Put and Buy 1 December 2018 Eurodollar 9900 Call Options - Vertical (VT) A Vertical (VT) options spread is made up of all calls or all puts and consists of buying a call at a strike price and selling a call at a higher strike price or buying a put at a strike price and selling a put at a lower strike price within the same instrument and expiration date. Spread ratio: (Buy 1: Sell 1) Security Definition Example: UD:U$: VT Call Vertical Construction: Buy1callstrike1exp1Sell1callstrike2exp1 Put Vertical Construction: Buy1putstrike2exp1Sell1putstrike1exp1 Example: Call Vertical Buy 1 December 2018 Eurodollar 9800 Call and Sell 1 December 2018 Eurodollar 9900 Call Example: Put Vertical Buy 1 December 2018 Eurodollar 9900 Put and Sell 1 December 2018 Eurodollar 9800 Put Options - Box (BX) A Box (BX) options combination consists of buying the call and selling the put at the same lower strike price and buying the put and selling the call at the same higher strike all within the same instrument and expiry month. Spread ratio: (Buy 1: Sell 1: Buy 1: Sell 1) Security Definition Example: UD:M5: BX Construction: Buy1callstrike1exp1 Sell1putstrike1exp1 Buy1putstrike2exp1 Sell1callstrike2exp1 Example: Box Buy 1 December mini-sized Dow Index Call Sell 1 December mini-sized Dow Index Put Buy 1 December mini-sized Dow Index Put Sell 1 December mini-sized Dow Index Call 3

4 Options - Butterfly (BO) A Butterfly (BO) options spread is constructed of all calls (Call Butterfly) or all puts (Put Butterfly). The Call Butterfly consists of buying a call, selling two calls at a higher strike price and buying a call at a still higher strike price within the same instrument and expiry month. The Put Butterfly consists of buying a put, selling two puts at a lower strike price and buying a put at a still lower strike price within the same instrument and expiry month. The Butterfly requires a specific symmetry in the strikes in that the difference between the strike prices is the same for all legs. Spread ratio: (Buy 1: Sell 2: Buy 1) Security Definition Example: UD:U$: BO Call Butterfly Construction: Buy1callstrike1exp1 Sell2callstrike2exp1 Buy1callstrike3exp1 Example: Call Butterfly Buy 1 December 2018 Eurodollar 9800 Call Sell 2 December 2018 Eurodollar 9825 Call Buy 1 December 2018 Eurodollar 9850 Call Put Butterfly Construction: Buy1putstrike3exp1 Sell2putstrike2exp1 Buy1putstrike1exp1 Example: Put Butterfly Buy 1 December 2018 Eurodollar 9850 Put Sell 2 December 2018 Eurodollar 9825 Put Sell 1 December 2018 Eurodollar 9800 Put Options - Conditional Curve (CC) Conditional Curve (CC) options spreads are unique to CME Group Interest rate products and consists of buying a call(put) at a strike in one product group and selling a call(put) at a strike in another product group. Additionally, it is possible to have a Conditional Curve spread with a single strike (i.e. same for each leg) or two different strikes, where both strikes are listed. Spread ratio: (Buy 1: Sell 1) Security Definition Example: UD:U$: CC Call Conditional Curve Construction: Buy1callstrikeexp1 instrument1 Sell1callstrikeexp1 instrument2 Example: Call Conditional Curve Buy 1 December Eurodollar 9800 Call Sell 1 December 1-year Mid-Curve 9800 Call Example: Put Conditional Curve Buy 1 December Eurodollar 9800 Put Sell 1 December 1-year Mid-Curve 9800 Put Options - Condor (CO) A Condor (CO) options spread is constructed of all calls (Call Condor) or all puts (Put Condor). The Call Condor consists of buying a call, selling one call at a higher strike price and selling a call at a still higher strike price, and buying a fourth call at a still higher strike price within the same instrument and expiry month. 4

5 The Put Condor consists of buying a put at the highest strike price, selling one put at a lower strike price, selling a put at a still lower strike price, and buying a fourth put at an even lower strike price within the same instrument and expiry month. The Condor requires a specific symmetry in the strikes in that the difference between the strike prices is the same for all legs. Spread ratio: (Buy 1: Sell 1: Sell 1: Buy 1) Security Definition Example: UD:U$: CO Call Condor Construction: Buy1callstrike1exp1 Sell1callstrike2exp1 Sell1callstrike3exp1Buy1callstrike4exp1 Example: Call Condor Buy 1 December 2018 Eurodollar Call Sell 1 December 2018 Eurodollar Call Sell 1 December 2018 Eurodollar Call Buy 1 December 2018 Eurodollar Call Put Condor Construction: Buy1putstrike4exp1 Sell1putstrike3exp1 Sell1putstrike2exp1Buy1putstrike1exp1 Example: Put Condor Buy 1 December 2018 Eurodollar Put Sell 1 December 2018 Eurodollar Put Sell 1 December 2018 Eurodollar Put Buy 1 December 2018 Eurodollar Put Options - Double (DB) A Double (DB) options spread is constructed of all calls (Call Double) or all puts (Put Double). The Call Double consists of buying a call at a strike price and buying another call at a higher strike price within the same instrument and expiry month. The Put Double consists of buying a put at a strike price and buying another put at a lower strike price within the same instrument and expiry month. Spread ratio: (Buy 1: Buy 1) Security Definition Example: UD:U$: DB Call Double Construction: Buy1callstrike1exp1 Buy1callstrike2exp1 Example: Call Double Buy 1 December 2018 Eurodollar Call Buy 1 December 2018 Eurodollar Call Put Double Construction: Buy1putstrike2exp1 Buy1putstrike1exp1 Example: Put Double Buy 1 December 2018 Eurodollar Put Buy 1 December 2018 Eurodollar Put Options - Horizontal Straddle (HS) A Horizontal Straddle (HS) options combination consists of buying a straddle at one strike price in the deferred month and selling a straddle at the same or different strike in the near month. 5

6 More specifically, a Horizontal Straddle (HS) consists of buying a call and buying a put at the same strike price in the deferred month and selling a call and selling a put at the same lower strike price in the near month, all within the same instrument and expiry month. Spread ratio: (Buy 1: Buy 1: Sell 1: Sell 1) Security Definition Example: UD:U$: HS Construction: Buy1callstrike1exp2 Buy1putstrike1exp2 Sell1callstrike1exp1 Sell1putstrike1exp1 Example: Horizontal Straddle Buying 1 Sept 2018 Eurodollar Call Buying 1 Sept 2018 Eurodollar Put Selling 1 June 2018 Eurodollar Call Selling 1 June 2018 Eurodollar Put Options - Iron Condor (IC) A Iron Condor (IC) options combination consists of buying a put spread and buying a call spread at higher strike prices. More specifically this consists of selling a put at one strike price, buying a put at a higher strike price, buying a call at a higher strike price, and selling a call at an even higher strike price, all within the same instrument and expiration. Spread ratio: (Sell 1: Buy 1:Buy 1: Sell 1) Security Definition Example: UD:T$: IC Construction: Sell1putstrike1exp1 Buy1putstrike2exp1 Buy1callstrike3exp1 Sell1callstrike4exp1 Example: Put Iron Condor Sell 1 June Year Treasury Bond 116 Put Buy 1 June Year Treasury Bond 117 Put Buy 1 June Year Treasury Bond 118 Call Sell 1 June Year Treasury Bond 119 Call Options - Ratio 1x2 (12) A Ratio 1x2 (12) options spread is constructed of all calls (Call Ratio 1x2) or all puts (Put Ratio 1x2). The Call Ratio 1x2 consists of buying a call and selling two calls at a higher strike price within the same instrument and expiry month. The Put Ratio 1x2 consists of buying a put at a strike price and selling two puts at a lower strike price within the same instrument and expiry month. Spread ratio (Buy 1: Sell 2) Security Definition Example: UD:U$: Call 1x2 Construction: Buy1callstrike1exp1 Sell2callstrike2exp1 Example: Call 1x2 Buy 1 March 2018 Eurodollar 9800 Call Sell 2 March 2018 Eurodollar 9950 Call Put 1x2 Construction: Buy1putstrike2exp1 Buy1putstrike1exp1 Example: Put 1x2 Buy 1 March 2018 Eurodollar 9950 Put 6

7 Sell 2 March 2018 Eurodollar 9800 Put Options - Ratio 1x3 (13) A Ratio 1x3 (13) options spread is constructed of all calls (Call Ratio 1x3) or all puts (Put Ratio 1x3). The Call Ratio 1x3 consists of buying a call at one strike price and selling three calls at a higher strike price within the same instrument and expiry month. The Put Ratio 1x3 consists of buying a put at one strike price and selling three puts at a lower strike price within the same instrument and expiry month. Spread ratio: (Buy 1: Sell 3) Security Definition Example: UD:M5: Call 1x3 Construction: Buy1callstrike1exp1 Sell3callstrike2exp1 Example: Call 1x3 Buying 1 March 2018 December mini-sized Dow Index Call Selling 3 March 2018 December mini-sized Dow Index Call Put 1x3 Construction: Buy1putstrike2exp1 Sell3putstrike1exp1 Example: Put 1x3 Buying 1 March 2018 December mini-sized Dow Index Put Selling 3 March 2018 December mini-sized Dow Index Put Options - Ratio 2x3 (23) A Ratio 2x3 (23) options spread is constructed of all calls (Call Ratio 2x3) or all puts (Put Ratio 2x3). The Call Ratio 2x3 consists of buying two calls at one strike and selling three calls at a higher strike price within the same instrument and expiry month. The Put Ratio 2x3 consists of buying two puts at one strike price and selling three puts at a lower strike price within the same instrument and expiry month. Spread ratio: (Buy 2: Sell 3) Security Definition Example: UD:U$: Call 2x3 Construction: Buy2callstrike1exp1 Sell3callstrike2exp1 Example: Call 2x3 Buy 2 March 2018 Eurodollar 9800 Call Sell 3 March 2018 Eurodollar 9950 Call Put 2x3 Construction: Buy2putstrike2exp1 Sell3putstrike1exp1 Example: Put 2x3 Buy 2 March 2018 Eurodollar 9950 Put Sell 3 March 2018 Eurodollar 9800 Put Options - Strip (SR) 7

8 A Strip (SR) options spread is constructed of all calls (Call Strip) or all puts (Put Strip). The Call Strip consists of buying calls within the same instrument and strike price for four equidistant expiry months, resulting in a total of four (4) calls purchased. The Put Strip consists of buying puts within the same instrument and strike price for each of four equidistant expiry months, resulting in a total of four (4) puts purchased. The Strip requires a specific symmetry in the expiry months in that the time difference between the expiry months is the same for all legs. Spread ratio: (Buy 1: Buy 1: Buy 1: Buy 1) Security Definition Example: UD:U$: SR Call Strip Construction: Buy1callstrike1exp1 Buy1callstrike1exp2 Buy1callstrike1exp3Buy1callstrike1exp4 Example: Call Strip Buy 1 June 2018 Eurodollar 9800 Call Buy 1 Sept 2018 Eurodollar 9800 Call Buy 1 Dec 2018 Eurodollar 9800 Call Buy 1 March 2019 Eurodollar 9800 Call Put Strip Construction: Buy1putstrike1exp1 Buy1putstrike1exp2 Buy1putstrike1exp3Buy1putstrike1exp4 Example: Put Strip Buy 1 June 2018 Eurodollar 9800 Put Buy 1 Sept 2018 Eurodollar 9800 Put Buy 1 Dec 2018 Eurodollar 9800 Put Buy 1 March 2019 Eurodollar 9800 Put Options - Risk Reversal (RR) A Risk Reversal (RR) options combination consists of buying a call and selling a put option within the same instrument and expiration month. The put component can be the same strike or a lower strike as the call option. Spread ratio: (Buy 1: Sell 1) Security Definition Example: UD:U$: RR Construction: Buy1callstrike2exp1 Sell1putstrike1or2exp1 Example: Risk Reversal Buy 1 June 2018 Eurodollar 9900 Call Sell 1 June 2018 Eurodollar 9800 Put GD Strip Spread The GD Strip Spread is the simultaneous purchase or sale of SA Strips at the sum of the SA Strip legs. The SA Strip legs are priced according to the SA Strip rules. The GD Strip Spread is identified by tag 762-SecuritySubType=GD. GD is available in options markets only in User-Defined spreads. Security Definition Example: UD:1T: GD A GD Strip Spread has One product Legs must be able to be understood as SA StripsQuantity ratio of 1:

9 Minimum of two legs Maximum of 26 legs Any side ratio is acceptable. All legs must have the same tick size May contain both buy SA Strips and sell SA Strips CME Globex recognizes a new UDS as a GD Strip Spread if the legs are submitted as outrights or if they are submitted as a recursive spread, even if the spread legs are not defined as SA Strips. For example, a recursive UDS with two VT Vertical legs will be recognized as a GD Strip Spread if the legs of the VT Verticals follow the SA Strip rules above. ilink execution messages for trades are only sent on the individual SA Strip legs. Pricing The Spread Trade Price is the differential of the SA Strip legs SA Strip legs are priced following the SA Strip rules Leg price assignment 1. Calculate Fair Price of the GD Strip Spread 2. Calculate the difference between the Fair Market Price and the Spread Trade Price 3. Assign the difference to each SA Strip leg equally to reach the Spread Trade Price Pricing Example GD Strip Spread trades at 100 SA Strip Leg 1 has Fair Market Average Price of 23. SA Strip Leg 2 has Fair Market Average Price of 123. Spread Trade Price = Fair Market Price; no remainder to distribute to the legs. a. SA Strip Leg1 = 23 b. SA Strip Leg2 = 123 Options - Xmas Tree (XT) The Xmas Tree (XT) options spread is constructed of all calls (Call Xmas Tree) or all puts (Put Xmas Tree). The Call Xmas Tree consists of buying a call at one strike, selling a call at a higher strike and selling yet another call at a higher strike, all within the same instrument and expiration month. The Put Xmas Tree consists of buying a put at a higher strike and selling a put at a lower strike and selling yet another put at a still lower strike, all within the same instrument and expiration month. The Xmas Tree requires a specific symmetry in the strikes in that the difference between the strike prices is the same for all legs. Spread ratio: (Buy 1: Sell 1: Sell 1) Security Definition Example: UD:U$: XT Call Xmas Tree Construction: Buy1callstrike1exp1 Sell1callstrike2exp1 Sell1callstrike3exp1 Example: Call Xmas Tree Buy 1 June 2018 Eurodollar 9800 Call Sell 1 June 2018 Eurodollar 9850 Call Sell 1 June 2018 Eurodollar 9900 Call Put Xmas Tree Construction: Buy1putstrike3exp1 Sell1putstrike2exp1 Sell1putstrike1exp1 Example: Put Xmas Tree Buy 1 June 2018 Eurodollar 9900 Put Sell 1 June 2018 Eurodollar 9850 Put Sell 1 June 2018 Eurodollar 9800 Put 9

10 Options - 3-Way (3W) A 3-Way (3W) options spread is constructed of calls and puts on the same instrument and expiry month with different strike prices. A Call 3-way consists of buying the call for the middle strike price, selling the call for high strike price, and selling the put for the low strike price. A Put 3-way consists of buying the put for middle strike price, selling the put for low strike price, and selling the call for the high strike price. Spread ratio: (Buy 1: Sell 1: Sell 1) Security Definition Example: UD:1H: 3W Call 3-Way Construction: Buy1callstrike2exp1 Sell1callstrike3exp1 Sell1putstrike1exp1 Example: Call 3-Way Spread Buy 1 July 2018 Lean Hog Call Sell 1 July 2018 Lean Hog Call Sell 1 July 2018 Lean Hog Put Put 3-Way Construction: Buy1putstrike2exp1 Sell1putstrike1exp1 Sell1callstrike3exp1 Example: Put 3-Way Spread Buy 1 July 2018 Lean Hog Put Sell 1 July 2018 Lean Hog Put Sell 1 July 2018 Lean Hog Call Options - 3-Way Straddle versus Call (3C) A 3-way: Straddle versus Call (3C) options combination consists of buying a Straddle and (versus) selling a Call in the same expiry month. The Straddle component consists of buying a Call and buying a Put in the same instrument, expiration, and strike price. The opposing (versus) component is to sell a Call for the same instrument and expiration but at a different strike price. Spread ratio: (Buy 1: Buy 1: Sell 1) Security Definition Example: UD:T$: 3C Construction: Buy1callstrike1exp1 Buy1putstrike1exp1 Sell1callstrike(2)exp1 Example: Buy the 3-way: Straddle versus Call Buy 1 December 2019 Ten-Year Treasury Note option 120 Call Buy 1 December 2019 Ten-Year Treasury Note option 120 Put Sell 1 December 2019 Ten-Year Treasury Note option 123 Call Options - 3-Way Straddle versus Put (3P) A 3-way: Straddle versus Call (3C) options combination consists of buying a Straddle and selling a Put in the same expiry month. The Straddle component consists of buying a Call and buying a Put in the same instrument, expiration, and strike price. The opposing component is to sell a Put for the same instrument and expiration but at a different strike price. Spread ratio: (Buy 1: Buy 1: Sell 1) Security Definition Example: UD:T$: 3P Construction: Buy1callstrike1exp1 Buy1putstrike1exp1 Sell1putstrike2exp1 Example: Buy the 3-way: Straddle versus Put 10

11 Buy 1 December 2019 Ten-Year Treasury Note option 120 Call Buy 1 December 2019 Ten-Year Treasury Note option 120 Put Sell 1 December 2019 Ten-Year Treasury Note option 117 Put Options - Iron Butterfly (IB) An Iron Butterfly (IB) options combination consists of buying a Straddle and selling a Strangle in the same expiry month. The IB components are to sell a Put at a strike price, buy Put and Call at higher strike price, and sell a Call at an even higher strike price. The strike prices do not have to be consecutive and the gaps between strike prices do not have to be equal. Spread ratio: (Sell 1: Buy 1: Buy 1: Sell 1) Security Definition Example: UD:T$: IB Construction: Sell1putstrike1exp1 Buy1putstrike2exp1 Buy1callstrike2exp1 Sell1callstrike3exp1 Example: Iron Butterfly Sell 1 March 2019 Ten-Year Treasury Note option 118 Put Buy1 March 2019 Ten-Year Treasury Note option 120 Put Buy 1 March 2019 Ten-Year Treasury Note option 120 Call Sell 1 March 2019 Ten-Year Treasury Note option 122 Call Options - Jelly Roll (JR) A Jelly Roll (JR) options combination is created by entering into two separate positions simultaneously. The first position involves buying a put and selling a call with the same strike price and expiration. The second position involves selling a put and buying a call. The strike prices of the put and call in the second position are identical but differ from the first position, and the duration of the second position is longer than the first position. This overall position creates a synthetic near-term short position and long-term long position that work to capitalize upon the time differential between underlying futures prices. Leg sequence Sell 1 call Buy 1 put Buy 1 call Sell 1 put Strike configuration Leg 1 strike = Leg 2 strike Leg 3 strike = leg 4 strike Leg 3 strike leg 1 strike Leg Expiration Leg 1 expiration = leg 2 expiration Leg 3 expiration = leg 4 expiration Leg 1 expiration < leg 3 expiration Spread ratio: (Sell 1: Buy 1: Buy 1: Sell 1) Security Definition Example: UD:U$: JR Buy Jelly Roll Construction: Sell1callstrike1exp1 Buy1putstrike1exp1 Buy1callstrike2exp2 Sell1putstrike2exp2 Example: Buy Jelly Roll Sell 1 Dec 2019 Eurodollar options 9750 Call Buy 1 Dec 2019 Eurodollar options 9750 Put Buy 1 March 2020 Eurodollar options 9825 Call Sell 1 March 2020 Eurodollar options 9825 Put Sell Jelly Roll Construction: Buy1callstrike1exp1 Sell1putstrike1exp1 Sell1callstrike2exp2 Buy1putstrike2exp2 11

12 Example: Sell Jelly Roll Buy 1 Dec 2019 Eurodollar options 9750 Call Sell 1 Dec 2019 Eurodollar options 9750 Put Sell 1 March 2020 Eurodollar options 9825 Call Buy 1 March 2020 Eurodollar options 9825 Put Options - Guts (GT) A Guts (GT) options combination consists of buying a Call at a strike price and buying a Put at a higher strike price in the same expiry. Spread ratio: (Buy 1: Buy 1) Security Definition Example: UD:T$: GT Construction: Buy1callstrike1exp1 Buy1putstrike2exp1 Example: Buy the Guts Buy 1 December 2019 Ten-Year Treasury Note option 120 Call Buy 1 December 2019 Ten-Year Treasury Note option 122 Put SA Strip The SA Strip is the simultaneous purchase or sale of futures or options positions at the averaged price of the legs; the spread price is identical to the price assigned to each leg. The SA Strip is identified by tag 762-SecuritySubType=SA. SA is available in futures and options markets in both Exchange- and User-Defined spreads. For more information, refer to the Average Price Method for Option Strips and Option Strip Spreads ic. An SA Strip has: One product Minimum of two legs Maximum of 26 legs Quantity/side ratio of +1: All legs must have the same tick size Expiration of all legs must be different and symmetric An options SA Strip has an additional requirement All legs must be either Calls or Puts For any single market, only FS or SA User-Defined Spreads will be recognized. Spread ratio: (Buy 1: Buy 1: Buy 1: Buy 1) Security Definition Example: UD:1T: SA Call Strip Construction: Buy1callstrike1exp1 Buy1callstrike1exp2 Buy1callstrike1exp3Buy1callstrike1exp4 Example: Call Strip Buy 1 June 2016 Natural Gas Call Buy 1 Sept 2016 Natural Gas Call Buy 1 Dec 2016 Natural Gas Call Buy 1 March 2017 Natural Gas Call Put Strip Construction: Buy1putstrike1exp1 Buy1putstrike1exp2 Buy1putstrike1exp3Buy1putstrike1exp4 12

13 Example: Put Strip Buy 1 June 2016 Natural Gas Call Buy 1 Sept 2016 Natural Gas Call Buy 1 Dec 2016 Natural Gas Call Buy 1 March 2017 Natural Gas Call CV Covered The CV Covered is the simultaneous purchase or sale of outright options or options spreads or combination with one or more outright futures; for example, buying call options and selling futures or selling put options and selling futures. The creator of the UDS is responsible for defining the direction, delta, price, and expiration of the futures leg(s). Covereds pricing and leg assignments follow the rules of the options leg; i.e., an outright options covered with a future is priced following the rules of the option leg and a VT Vertical covered with a future is priced following the rules of the VT Vertical. The CV Covered is identified with tag 762-SecuritySubType=CV: XX, where XX is either "FO" for an outright option or the options spread type (e.g., "GN", "VT"). CV Covered is available as an options-futures User-Defined Spread only. A CV Covered has: Pricing Many products At least one and up to 25 outright futures legs, with defined directions, deltas, prices and terms At least one options outright or options spread Any quantity ratio, so long as the ratio has the least common denominator possible Any side ratio, as long as the first option outright or option spread leg is a buy The Spread Trade Price is the price or differential of the outright options or options spread legs A CV Covered SA Strip follows the SA pricing rules A CV Covered GD Strip Spread follows the GD pricing rules Leg price assignment 1. If options leg(s) are a spread or combination, the Spread Trade Price is calculated following the defined spread rules a. If options leg is an outright, the Spread Trade Price is assigned to the options leg 2. Multiply the Delta times the total number of traded options 3. Assign the futures quantity at the Futures Leg Price Pricing Example CV Covered trades 100 lots at 25 Leg1 is a 1 lot buy options outright Leg2 is a 1 lot sell futures outright, Delta 47 and price 200, Outright options Leg1 is assigned Spread Trade Price of 25 a. Futures outright Leg2 sells 47 lots (Delta * traded options quantity) at defined price of 200,000. Options - Reduced Tick Inter-Commodity Option Spread (EO) For UDS creation, a Reduced Tick Inter-Commodity Option Spread (EO) spread or combination consists of buying one American Natural Gas Option (ON) and selling one European Natural Gas Option (LNE) with a reduced tick. Strike prices and months do not have to be consecutive, and either leg can be a call or a put. Buy Spread Ratio: (Buy 1 ON: Sell 1 LNE) Security Definition Example: UD:1T: EO Example 1 Buy 1 April 2017 ON Natural Gas Option (American) 2750 Call Sell 1 April 2017 LNE Natural Gas Option (European) 2750 Call Example 2 Buy1 March 2017 ON Natural Gas Option (American) 3100 Call 13

14 Sell 1 April 2017 LNE Natural Gas Option (European) 2950 Put Exchange Unrecognized Spread and Combination Types If the options spread or combination requested by the user is not identified as one of the CME Globex exchange recognized spread types, but has a valid construction, the instrument will be created exactly as the user requested and designated in market data as 'GN' (generic). Under the generic designation, the user can create options spread instruments composed of multiple spread types. For example, a unique options spread instrument can be created by combining the configurations of a Vertical options spread and Xmas tree options spread into a unique Generic instrument. Generic spreads can contain up to 26 outrights. This count is irrespective of leg ratio. For example, when the user submits a proposed user defined spread to CME Globex containing an options butterfly (buy1, sell2, buy1) as a leg, CME Globex will count that instrument as 3 (buy/sell/buy) instruments against the 26 instrument limit. For additional information, see User-Defined Spread (UDS). For advanced information on UDS construction rules, see UDS - Validation and Messaging Rules. UDS Covered Options The term Covered denotes a unique delta-neutral instrument created by combining an outright option or options spread with one or more underlying outright futures instruments. A Covered options instrument can have up to 25 futures outright legs and must contain a minimum of one options outright. Delta When customers request the creation of a covered, CME Globex validates the proposed delta by performing a 'delta reasonability' check. During the match process for orders on Covered instruments, CME Globex determines the Covering future quantity by multiplying the outright option or option spread quantity by the absolute value of delta and then rounding according to the rules specific to incoming and resting orders. Delta Neutrality To ensure delta neutrality on covered options, CME Globex rejects New Order, Cancel/Replace, and Mass Quote messages violating the minimum quantity value sent in tag 526-MinTradeVol of the market data Security Definition (tag 35-MsgType= d) message. In response to: New Order (tag 35-MsgType=D) Cancel Replace (tag 35-MsgType=G) Execution Report (tag 35-MsgType=8), tag 103-OrdRejReason = Tag 58-Text 2115 Order quantity is outside of the allowable range'quantity: <Requested Quantity> Max: <Maximum configured for contract> Min: <Minimum configured for contract> 7613 Disclosed quantity cannot be smaller than the minimum quantity 'Disclosed: <Requested Quantity> Min: <Minimum configured for contract> In response to: Mass Quote (tag 35-MsgType=i) Quote Request (tag 35-MsgType=R) Quote Acknowledgment (tag 35-MsgType=b), tag 368-QuoteEntryRejectReason = Tag 58-Text 14

15 7112 Quote exceeds limit. Delta Neutrality Feature Files Basic Covered.feature This feature file demonstrates how Covered delta neutrality ies ensured by enforcing a minimum quantity on the Covered. The minimum quantity of the covered order is determined by the future leg delta of covered. ######################################################################## ############################################# Background: Given the following: * Instrument Group Configurations: groupname E0 GE U$ * Contracts: symbol TE0H2 C9875 GEZ0 GEH2 * initial covered minimum quantity configuration for instrument group "U$": delta minqty ######################################################################## ############################################# Scenario: Basic Covered, positive delta, Allocation of Min Qty When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle

16 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 ######################################################################## ############################################# Scenario: Basic Covered, negative delta, Allocation of Min Qty When the following events occur: # Set the settlements for runnable mode * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to the Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 ask settle 0.50 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 ######################################################################## ############################################# Scenario: Basic Covered, Two Futures, positive delta, Allocation of Min Qty When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ GEH * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to the Globex: 16

17 rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle 0.50 GE GEH2 ask settle 0.30 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 ######################################################################## ############################################# Scenario: Basic Covered, Two Futures, negative delta, Allocation of Min Qty When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ GEH * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 ask settle 0.15 GE GEH2 ask settle 0.65 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 20 17

18 ######################################################################## ############################################# Scenario: Basic Covered, Two Futures bid and ask, Allocation of Min Qty When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ GEH * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle 0.5 GE GEH2 ask settle 0.5 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 ######################################################################## ############################################# Scenario: Basic Covered, more than 2 Futures, Allocation of Min Qty When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ GEH GEZ * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit 18

19 GE GEZ0 bid settle 0.75 GE GEH2 ask settle 0.55 GE GEZ1 bid settle 0.15 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 20 ######################################################################## ############################################# Scenario: Basic Covered created, Update in Min Qty configuration, duplicate Covered created and rejected When the following events occur: * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ GEH * the group(s) "GE" is put in "open" with reset statistics "on" * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle 0.30 * update instrument group "U$" with covered minimum quantity configuration: delta minqty * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered2 COVERED UDSCovered3 COVERED * with legs for "uds": "UDSCovered2" legsymbol legsecuritydesc legside legprice 19

20 legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle 0.30 * with legs for "uds": "UDSCovered3" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEH2 bid settle 0.75 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 UDSCovered3 2 * expect execution message(s) with values: identifier messagetype securitysubtype nolegs securitydescription symbol securityresponsetype expirationcycle autoquoterequest securityidsource UDSCovered sde response COVERED 2 UDSCovered U$ 2 0 Y 4 # duplicate UDS rejected with securityresponsetype=5 * expect execution message(s) with values: identifier messagetype securitysubtype nolegs securitydescription securityresponsetype UDSCovered2 sde response COVERED 2 UDSCovered 5 # new UDS created with updated bucket config * expect execution message(s) with values: identifier messagetype securitysubtype nolegs securitydescription symbol securityresponsetype expirationcycle autoquoterequest securityidsource UDSCovered3 sde response COVERED 2 UDSCovered3 U$ 2 0 Y 4 ######################################################################## ############################################# Scenario: Update in Min Qty configuration, new Basic Covered UDS created When the following events occur: 20

21 * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice GEZ * the group(s) "GE" is put in "open" with reset statistics "on" * update instrument group "U$" with covered minimum quantity configuration: delta minqty * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid omit omit GE GEZ0 bid settle 0.32 Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 10 21

22 Modified Limit Order feature When a Delta Min Quantity is configured in STAR for a UDS destination group and a UDS is created in that group, the correct minimum quantity shall be allocated to that UDS and only modified Limit orders that have a Min Qty equal to or more than the Min Qty allocated shall be accepted. Otherwise a business reject should be sent back to the client system. ######################################################################## ############################################# Background: Given the following: * Instrument Group Configurations: groupname E0 GE U$ * Contracts: symbol TE0H2 C9875 GEZ0 GEH2 * initial covered minimum quantity configuration for instrument group "U$": delta minqty * the group(s) "GE" is put in "closed" with reset statistics "on" * the following attributes are updated for contract(s) in real time: securitydescription settlementprice bandswitch GEZ false * the group(s) "GE" is put in "open" with reset statistics "on" ######################################################################## ############################################# Scenario: New Limit Order accepted using allocated Min Qty When the following events occur: * these "UDS" message(s) are sent to Globex: rgidentifier securitysubtype UDSCovered COVERED * with legs for "uds": "UDSCovered" 22

23 legsymbol legsecuritydesc legside legprice legoptiondelta E0 TE0H2 C9875 bid OMIT OMIT GE GEZ0 bid settle 0.34 * these "new order" message(s) are sent to Globex: identifier CTICode CustomerOrFirm TimeInForce Price OrdType Side OrderQty SecurityDescription Order1 1 1 session 100 limit bid 8 UDSCovered Order2 1 1 session 100 limit bid 6 UDSCovered # Change delta min qty configuration. This should have no effect on existing Covereds * update instrument group "NR" with covered minimum quantity configuration: delta minqty * these "cancel replace" message(s) are sent to the Globex: OrderId ordtype price identifier OrderQty # modify is rejected because Modified Order Qty id below Delta MinQty Order1 limit Order3 4 # Modify is accepted as orderqty is equal to Delta MinQty Order2 limit Order4 5 * these "new order" message(s) are sent to the Globex: identifier CTICode CustomerOrFirm TimeInForce Price OrdType Side OrderQty SecurityDescription Order5 1 1 session 100 limit ask 6 UDSCovered # Order is Rejected as OrderQty < MinQty Order6 1 1 session 100 limit bid 1 UDSCovered Then the following should happen: * expect a "NEW" UDS update for the following contracts: symbol minquantity UDSCovered 5 * expect execution message(s) with values: rgidentifier messagetype securitysubtype nolegs securitydescription symbol securityresponsetype expirationcycle autoquoterequest securityidsource UDSAck1 sde response COVERED 2 UDSCovered U$ 2 0 Y 4 23

24 * with legs for UDS Ack: "UDSAck1" legsecuritydesc legsymbol legratioqty legside TE0H2 C9875 E0 1 bid GEZ0 GE 1 bid * expect execution message(s) with values: messagetype OrderQty OrdType Side Symbol SecurityDescription CumQty OrdStatus Price TimeInForce LeavesQty order ack 8 limit bid U$ UDSCovered session 8 order ack 6 limit bid U$ UDSCovered session 6 # Cancel reject for Order 3 * expect execution message(s) with values: messagetype CxlRejReason text cancel reject 2115 Order quantity is outside of the allowable range 'Quantity: 4 Max: 8000 Min: 5' * expect execution message(s) with values: messagetype TimeInForce SecurityDescription OrderQty Side order replaced session UDSCovered 5 bid * expect execution message(s) with values: messagetype OrderQty OrdType Side Symbol SecurityDescription CumQty OrdStatus Price TimeInForce LeavesQty order ack 6 limit ask U$ UDSCovered session 6 # business reject for Order 6 * expect execution message(s) with values: messagetype OrderQty OrdRejReason text 24

25 order reject Order quantity is outside of the allowable range 'Quantity: 1 Max: 8000 Min: 5' Expiration A Covered instrument either expires with the earliest expiration of its component leg instruments or at the end of the trading session. Valid Instruments All listed CME Group outright options and options spreads are available for creating Covered spreads, and all listed outright futures contracts are available as a Covering future. Both CME Globex exchange recognized and unrecognized spread types may be Covered. 25