WO2015123391A2 - Software, systems, apparatus, methods, and media for providing daily forward-start options - Google Patents

Software, systems, apparatus, methods, and media for providing daily forward-start options Download PDF

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WO2015123391A2
WO2015123391A2 PCT/US2015/015568 US2015015568W WO2015123391A2 WO 2015123391 A2 WO2015123391 A2 WO 2015123391A2 US 2015015568 W US2015015568 W US 2015015568W WO 2015123391 A2 WO2015123391 A2 WO 2015123391A2
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option
computer
date
electronically encoded
purchase
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PCT/US2015/015568
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French (fr)
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WO2015123391A3 (en )
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Robert Krause
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Krause Kg Robert
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    • GPHYSICS
    • G06COMPUTING; CALCULATING; COUNTING
    • G06QDATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q40/00Finance; Insurance; Tax strategies; Processing of corporate or income taxes
    • G06Q40/04Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

Computer systems, methods, and exchanges for generating and trading novel financial derivative products, daily options are described. In one aspect, an electronic, computer-controlled system for electronically creating, recording, trading, and settling an advance-purchase, single-day option on an underlying, the advance-purchase, single-day option having an option purchase date, an option listing date, and an option expiration date is provided. In a first embodiment, the system comprises: computer-compatible electronic memory including an electronically encoded representation of the advance-purchase, single-day option based on an underlying. The electronically encoded representation includes an electronically encoded representation of a strike price determination date, the strike price determination date being the date that is one trading day prior to the option expiration date.

Description

SOFTWARE, SYSTEMS , APPARATUS , METHODS , AND MEDIA FOR PROVIDING DAILY FORWARD- START

OPTIONS

1 Cross-Reference to Related Applications

[0001] This application claims priority under 35 U.S.C. § 119(e) to U.S. Patent Application Serial No. 61/938,751, filed 12 February 2014, the entire disclosure of which is incorporated herein by reference in its entirety and for all purposes.

2 Notice of Copyright

[0002] Portions of this patent application include materials that are subject to copyright protection. The copyright owner has no objection to the facsimile reproduction by anyone of the patent document itself, or of the patent application, as it appears in the files of the United States Patent and Trademark Office, but otherwise reserves all copyright rights whatsoever in such included copyrighted materials.

3 Background of the Invention

3.1 Field of the Invention

[0003] The present invention provides software, systems, apparatus, methods, and media for creating and trading unique, derivative instruments. The present invention thus has applications in the fields of finance, derivative, trading, risk management, insurance, securities, investments, and banking; the trading, pricing, and bidding of standardized securities options, swap options, and futures options; and systems relating thereto.

3.2 The Related Art

[0004] Throughout the history of modern finance, portfolio managers and market practitioners have measured, calculated, dissected, analyzed, and attempted to man- age risk. Investors today can choose from a myriad of instruments to manage such risk. Each instrument offers a particular combination of risk and return potential based on the particular terms of an investment contract, to create investment portfolios of almost arbitrarily complex risk-return characteristics. Options are especially adept at configuring the risk/reward profile in nearly limitless ways. There are two primary marketplaces for trading options: a regulated, listed market (exchange), and the unregulated, private market (over-the-counter).

[0005] Options have existed for centuries. Russel Sage is credited with introducing over-the-counter options, which were not liquid and not standardized, in 1872. In their modern-day form, standardized, listed options have been trading on exchanges in the U.S. since 1973. Options can be readily compared to insurance contracts. With insurance, a buyer pays a premium upfront and then if the underlying asset, such as a house or car, incurs an economic loss, the seller of the insurance must indemnify the buyer for the loss. Options work similarly. The buyer pays the premium upfront and the seller stands ready to cover any potential loss. Unlike a futures contract, which obligates the buyer and seller to perform, an options contract confers to the buyer the right but not the obligation. This simple idea of allowing the buyer the ability to walk away from his potential obligation provides options traders with a unique opportunity not available in any other type of instrument.

[0006] An option contract is a legal agreement giving the buyer the right, but not the obligation, to buy (in the case of a "call" ) or sell (in the case of a "put" ) some asset (more broadly defined as an "underlying) at a specific price (the "strike price" ) on a specific date (the "expiration date" ) in the future. Unlike the buyer, the seller of the option has the obligation to perform.

[0007] Despite the proliferation of options in the marketplace, there are still unfulfilled features that are known to be in demand by market participants. Several commonly observed limitations are listed below:

1. Daily Expiration

Because weekly options have been so successful lately, it is natural to assume that perhaps providing expiration's on an even shorter time frame (daily) would meet with significant demand in the marketplace. Yet no such options have ever been available. Risk Models

Risk managers use risk models that often employ stress tests and what-if scenarios on daily price changes. However, these risk models are not just analyzing tomorrows risk. They are analyzing risk each day sometimes far into the future. LEAPS, quarterly, monthly, or weekly options could provide the risk control far into the future. However, using options longer than daily could incur large, potentially prohibitive, cost. Conversely, simple daily options would not be listed far enough ahead of time to manage risk far into the future. In other words, current simple, standard options do not match the instrument risk to the model risk. Liquidity

Trading volume that finds its way into the options market currently gets disbursed among the large array of strike prices. The more strikes, the less volume at each strike, and the larger the bid/ask spread often becomes (hence an increased total transaction costs to traders in the form of wider bid-ask spreads). If there were fewer strike, volumes would tend to increase, bid-ask spreads would tighten, and liquidity should increase. Ultimately, increased liquidity would drive volumes higher as the cost of transacting were reduced. In-the-Money Options

In-the-money ( "ITM" ) options are in little demand. The bulk of options traded are the at-the-money ( "ATM" ) and on-the-money ( "OTM" ) options. Unfortunately, the ITM options are also more sensitive to price changes of the underlying. This means that market makers must continually update live ITM option quotes more frequently. The large flow of quotes from weekly option updates is already taxing computer systems, and doing so is of little value because few desire to trade them. If daily options were adopted those updated market quotes would perhaps increase five times, potentially overloading the capacity of current systems. Time to Expiration

Standard options are active as soon as they are listed. And, since options are typically listed four-to-six times longer than their listing period, this means that standard daily options would be active for approximately one week (5 days). There are two problems with this: First, traders may desire to trade a daily option farther in advance than one week (not long enough). Second, since these options are active the whole time, trading days in advance means that the option is more costly (too long). ATM Strike

With current point increments between strikes, traders cannot be guaranteed of getting an option that is ATM at some point in the future. Since ATM options are the most desired, getting a close-to- ATM may not be good enough for some traders. In addition, they could not know ahead of time which strike would be the closest-to-ATM on the day it is needed. Percentage Changes

While most news services report point changes, most traders, and their risk systems, think in terms of percentages. Having option strikes that are based in percentages would match the instrument to the risk management systems. Trading a Future Strike

If a trader wants to get a certain strike-in-relation-to-the-underlying in the future, it is only through luck with standard options. For example, suppose that it is Monday and a trader wants an ATM strike for Friday (getting an ATM strike referencing Thursdays close). How is this possible? Buying an ATM strike on Monday will not work because it is not known where the underlying will be on Thursdays close. The trader could get lucky and happen to select the correct strike. But, most likely, this will not be the case. Waiting until Thursdays close may not be acceptable because the price of the option may change to an unacceptable level. Having the ability to buy the ATM strike today (four days prior) could offer the trader exactly what he desires and at a price he deems to be fair long before the day arrives.

[0008] New types of options are desirable to enable more investment opportunities. The present invention meets these and other needs.

4 Summary of Embodiments of the Invention

[0009] The present invention provides novel systems, methods, software, and apparatus for creating, recording, trading, and settling an advance-purchase, single-day option on an underlying. As noted above, such options instruments are new and address important limitations in current options markets. Because modern markets, especially options markets, are no longer operated using pencil-and-paper type operations, but rather depend on the speeds and data volumes that can only be managed using high speed electronic digital computers, electronic computer memory, and fast high-security electronic communications networks, the embodiments of the systems, methods, software, and apparatus of the invention described herein are necessarily electronic in nature.

[0010] In a first aspect, the present invention provides an electronic, computer- controlled system for electronically creating, recording, trading, and settling an advance- purchase, single-day option on an underlying (also referred to herein as a "daily option" ), the advance-purchase, single-day option having an option purchase date, an option listing date, and an option expiration date. In a first embodiment, the system comprises: computer-compatible electronic memory including an electronically encoded representation of the advance-purchase, single-day option based on an underlying. The electronically encoded representation includes an electronically encoded representation of a strike price determination date, the strike price determination date being the date that is one trading day prior to the option expiration date. [0011] In a more specific embodiment, the electronically encoded representation further includes electronically encoded representations of strike prices, the strike prices being based on the price of the underlying on the strike price determination date. A more specific embodiment is one wherein the strike prices are based on a percentage of the price of the underlying on the strike price determination date. A still more specific embodiment still further includes encoding the strike prices as percentage increments or decrements of the price of the underlying. Yet more specific embodiments further comprise an electronically encoded static array of the strike prices.

[0012] In a more specific embodiment, in addition to the first described embodiment the electronically encoded representation further includes electronically encoded representations of strike prices based on the price of the underlying on the strike price determination date, and further includes an electronically encoded representations of the call strike price of the option and the put strike price of the option, wherein each of the call strike price and the put strike price is a multiple of the percentage increment or decrement of the price of the underlying. In another more specific embodiment, each of said call strike price and said put strike price is equal to the closing price of said underlying on said strike price determination date.

[0013] Another more specific embodiment, the first described embodiment further comprises one or more electronically encoded representations of a group of the electronically encoded options, each of the electronically encoded options being of the same electronically encoded type, having the same electronically encoded strike price, and electronically encoded consecutive, daily expiration dates.

[0014] In second aspect, the present invention provides a method for electronically creating, recording, trading, and settling an advance-purchase, single-day option on an underlying, the advance-purchase, single-day option having an option purchase date, and option listing date, and an option expiration date, under computer control. In first embodiment, the method of the invention comprises: providing computer- compatible electronic memory including an electronically encoded representation of the advance-purchase, single-day option based on an underlying, the electronically encoded representation including an electronically encoded representation of a strike price determination date, the strike price determination date being the date that is one trading day prior to the option expiration date; and electronically operating on the strike price determination date using an computer-controlled electronic data processing device configured to execute operations in accordance with at least one of the creating, recording, trading, and settling of the advance-purchase, single-day option.

[0015] A more specific embodiment of the first embodiment of the method further comprises creating an encoded representation of a group of the options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates. A still more specific embodiment still further comprises trading the group under computer control as a single transaction. A yet more specific embodiment yet further comprising clearing under computer control each option of the group as an individual transaction.

[0016] A more specific embodiment of the first embodiment of the method further comprises creating an encoded representation of a group of the options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates. A still more specific embodiment still further comprises trading the group under computer control as a single transaction. Other yet more specific embodiments further comprise trading the group under computer control in groups of a whole calendar week, a whole calendar month, a whole calendar quarter, or a whole calendar year; and trading the group under computer control in groups of a whole non-calendar week, a whole non-calendar month, a whole non- calendar quarter, or a whole non-calendar year.

[0017] In a third aspect, the present invention provide a non-transitory computer- readable medium containing a computer program product for operating a computer data processing device having an operating system, the computer program product being configured to enable the computer data processing device to electronically create, record, trade, and settle an advance-purchase, single-day option on an underlying, the advance-purchase, single-day option having a option purchase date, an option listing date, and an option expiration date, under computer control, the computer program product being configured to enable the computer data processing device to perform actions. In a first embodiment, the computer program product is configured to enable an electronic computer to perform operations comprising: providing computer- compatible electronic memory including an electronically encoded representation of the advance-purchase, single-day option based on an underlying, the electronically encoded representation including an electronically encoded representation of a strike price determination date, the strike price determination date being the date that is one trading day prior to the option expiration date; and electronically operating on the electronically encoded representation of the strike price determination date using a computer-controlled electronic data processing device configured to execute operations in accordance with at least one of the creating, recording, trading, and settling of the advance-purchase, single-day option.

[0018] In a more specific embodiment, the electronically encoded representation further includes electronically encoded representations of strike prices, the strike prices being based on the price of the underlying on the strike price determination date. A more specific embodiment is one wherein the strike prices are based on a percentage of the price of the underlying on the strike price determination date. A still more specific embodiment still further includes encoding the strike prices as multiples of the percentage increments or decrements of the price of the underlying. Yet more specific embodiments further comprise an electronically encoded static array of the strike prices.

[0019] In a more specific embodiment, in addition to the first described embodiment the electronically encoded representation further includes electronically encoded representations of strike prices based on the price of the underlying on the strike price determination date, and further includes an electronically encoded representations of the call strike price of the option and the put strike price of the option, wherein each of the call strike price and the put strike price is a multiple of the percentage increment or decrement of the price of the underlying. In another more specific embodiment, each of said call strike price and said put strike price is equal to the closing price of said underlying on said strike price determination date.

[0020] Another more specific embodiment, the first described embodiment further comprises one or more electronically encoded representations of a group of the electronically encoded options, each of the electronically encoded options being of the same electronically encoded type, having the same electronically encoded strike price, and electronically encoded consecutive, daily expiration dates.

[0021] In second aspect, the present invention provides a method for electronically creating, recording, trading, and settling an advance-purchase, single-day option on an underlying, the advance-purchase, single-day option having an option purchase date, and option listing date, and an option expiration date, under computer control. In first embodiment, the method of the invention comprises: providing computer- compatible electronic memory including an electronically encoded representation of the advance-purchase, single-day option based on an underlying, the electronically encoded representation including an electronically encoded representation of a strike price determination date, the strike price determination date being the date that is one trading day prior to the option expiration date; and electronically operating on the strike price determination date using an computer-controlled electronic data processing device configured to execute operations in accordance with at least one of the creating, recording, trading, and settling of the advance-purchase, single-day option.

[0022] A more specific embodiment of the first embodiment of the method further comprises creating an encoded representation of a group of the options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates. A still more specific embodiment still further comprises trading the group under computer control as a single transaction. A yet more specific embodiment yet further comprising clearing under computer control each option of the group as an individual transaction. [0023] A more specific embodiment of the first embodiment of the method further comprises creating an encoded representation of a group of the options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates. A still more specific embodiment still further comprises trading the group under computer control as a single transaction. Other yet more specific embodiments further comprise trading the group under computer control in groups of a whole calendar week, a whole calendar month, a whole calendar quarter, or a whole calendar year; and trading the group under computer control in groups of a whole non-calendar week, a whole non-calendar month, a whole non- calendar quarter, or a whole non-calendar year.

5 Detailed Description of Some Embodiments of the Invention

5.1 Definitions

[0024] Unless indicated otherwise, the following terms and definitions will apply herein.

Underlying As used herein and "underlying" is something from which an option (e.g., a daily option, such as a RealDay™ Option product) derives its value. A suitable underlying can be any subject matter having a daily or intra-day price, including, but not limited to: a tangible or intangible asset, instrument, basket, index, security, derivative, bond, debt, foreign currency, commodity, option, any measurement (such as snowfall, rainfall, temperature, carbon release or capture, emissions, heat, light, electricity, gas, liquid, solid, energy, air, water, etc.); any calculation of such subject matter (such as standard deviation, implied volatility, realized volatility, realized variance, correlation, dispersion, difference, ratio, regression, autocorrelation, etc.); and any other quantity that can be determined with sufficient robustness to define the terms of an option instrument used in accordance with the invention. Such quantities and their determination will be understood by those having ordinary skill in the art. Option As used herein, an "option" derivative instrument giving the buyer the right, but not the obligation, to buy (in the case of a call option), or sell (in the case of a put option) a certain amount of an underlying at (in the case of a European- style option) or at, or prior to, (in the case of an American-style option) a predetermined expiration date and time. Note: Every option is either cash settled or settlement is effected by making or taking delivery of the underlying. Therefore, to be more precise, an option should be defined clS Si C9JS h settled option" or a "deliverable option." Since this distinction has no effect on an option premium prior to expiration, most option discussions omit this fact.

RealDay™ Option A trade name for the novel advance-purchase, single-day (i.e., "daily" ) financial instrument of the invention described herein.

Derivative As used herein, a "derivative" is an instrument whose value is based on, or derived from, an underlying.

Exchange As used herein, an "exchange" is any public or private, regulated or not regulated, electronic marketplace where derivative instruments, such as, but not limited to, options, futures, and swaps are traded and centrally cleared.

Listed or Listing As used herein, a "list" or a "listing" is a standardized instruments that are made available for trading on an exchange.

OTC As used herein, "OTC" refers to over-the-counter. Any private agreement between two parties where customized, typically illiquid, non- or loosely-regulated, derivative instruments are transacted.

SEF As used herein, "SEF" refers to a "swap execution facility" . This is an exchange that has virtues of both the OTC marketplace and a listed marketplace. Since the instruments on a SEF are standardized and centrally cleared, the author claims rights to RealDay™ Options traded on SEFs.

Asset As used herein, "asset" refers to any tangible or intangible item that has a price or value. Close As used herein, "close" refers to the final, last, or settlement price each day. If a market is traded continuously (foreign currency as an example), the "close" may be a set time of day that market participants understand to be the "end of the day." Note: The end of the day does not necessarily mean at midnight.

Active period As used herein, "active period" refers to the period during an option's life where it acts like an option (the premium decays and it moves with the underlying price changes). Standard options are always in the active period. In contrast, the options of the present invention do not decay nor change very much with the price of the underlying price changing prior to expiration day (this is called the "dormant period" ). The active period of a RealDay™ Option is only on expiration day.

CPU As used herein, "CPU" refers to the closing price of the underlying on any particular day when used in a context outside of computer or electronic computation.

Theta As used herein, "theta" refers to the time decay of an option: as an active option approaches expiration, its value erodes. Generally, theta is not a linear function of time.

5.2 Computer Systems, Apparatus, Software, and Methods for Generating and Trading Daily Options

[0025] The invention described relates to the electronic encoded representations of novel daily options, such as provided under the trade name RealDay™ options, and the various parameters and variable that compose such encodings, as well as the computer-controlled electronic manipulation and communication of such representations. As noted above, such electronic representations, manipulations, and communication is necessary to enable the use of daily options given the data volumes and trading speeds of modern options markets. [0026] The invention described herein can be implemented in digital electronic circuitry, or in computer hardware, firmware, software, or in combinations thereof. As will be apparent to those having ordinary skill in the art, only computer implementation of the invention can enable the transaction volumes and frequencies necessary for modern investment operations involving the novel financial indices described herein. Data on the investment instruments described herein, generation, trading, and settling of such indices and their trades, the creation and maintenance of indices, and other relevant information are stored, manipulated, and transmitted using such digital electronic circuitry, or in computer hardware, firmware, software, or in combinations thereof. Apparatus of the invention can be implemented in a computer program product tangibly embodied in a machine-readable storage device for execution by a programmable processor; and method steps of the invention can be performed by a programmable processor executing a program of instructions to perform functions of the invention by operating on input data and generating output. The invention can be implemented advantageously in one or more computer programs that are executable on programmable systems including at least one programmable processor coupled to receive data and instructions from, and to transmit data and instructions to, a data storage system, at least one input device, and at least one output device. Each computer program can be implemented in a high-level procedural or object- oriented programming language, or in assembly or machine language if desired; and in any case, the language can be a compiled or interpreted language. Suitable processors include, by way of example, both general and special purpose microprocessors. Generally, a processor will receive instructions and data from a computer memory device, such as, but not limited to, read-only memory and random access memory. Generally, a computer will include one or more mass storage devices for storing data files; such devices include magnetic disks, such as internal hard disks and removable disks; magneto-optical disks; and optical disks.

[0027] Storage devices suitable for tangible (i.e., non-transient) provision of computer program instructions and data described herein include all forms of non- volatile memory, including by way of example semiconductor memory devices, such as EPROM, EEPROM, and flash memory devices; magnetic disks such as internal hard disks and removable disks; magneto-optical disks; and CD-ROM disks. Any of the foregoing can be supplemented by, or incorporated in, ASICs (application-specific integrated circuits). All of these are referred to herein generally as "computer-readable media containing computer-readable program control devices." To provide for interaction with a user, the invention can be implemented on a computer system having a display device such as a monitor or LCD screen for displaying information in conjunction with the inversion to the user. The user can provide input to the computer system through various input devices such as a keyboard and a pointing device, such as a mouse, a trackball, a microphone, a touch-sensitive display, a transducer card reader, a magnetic or paper tape reader, a tablet, a stylus, a voice or handwriting recognizer, or any other well-known input device such as, of course, other computers. The computer system can be programmed to provide a graphical user interface through which computer programs interact with users.

[0028] Finally, the processor can be coupled to a computer or telecommunications network, for example, an Internet network, or an intranet network, using a network connection, through which the processor can receive information from the network, or might output information to the network in the course of performing the above- described method steps. Such information, which is often represented as a sequence of instructions to be executed using the processor, can be received from and output to the network, for example, in the form of a computer data signal embodied in a carrier wave. The above-described devices and materials will be familiar to those of skill in the computer hardware and software arts.

[0029] It should be noted that the present invention employs various computer- implemented operations involving data, in particular data described above in conjunction with the invention, stored in computer systems. These operations include, but are not limited to, those requiring physical manipulation of physical quantities. Usually, though not necessarily, these quantities take the form of electrical or magnetic signals capable of being stored, transferred, combined, compared, and otherwise manipulated. The operations described herein that form part of the invention are useful machine operations. The manipulations performed are often referred to in terms such as, producing, identifying, running, determining, comparing, executing, downloading, or detecting. It is sometimes convenient, principally for reasons of common usage, to refer to these electrical or magnetic signals as bits, values, elements, variables, characters, data, or the like. It should remembered, however, that all of these and similar terms are to be associated with the appropriate physical quantities and are merely convenient labels applied to these quantities.

[0030] The present invention also relates to devices, systems or apparatus for performing the aforementioned operations. The system can be specially constructed for the required purposes, or it can be a general-purpose computer selectively activated or configured by a computer program stored in the computer. The processes presented above are not inherently related to any particular computer or other computing apparatus. In particular, various general-purpose computers can be used with programs written in accordance with the teachings herein, or, alternatively, it can be more convenient to construct a more specialized computer system to perform the required operations.

[0031] A number of implementations of the invention have been described. Nevertheless, it will be understood that various modifications can be made without departing from the spirit and scope of the invention. Accordingly, other embodiments are within the scope of the invention.

[0032] In one aspect, the preset invention provides a computer system for generating and trading an advance-purchase, single-day (or "daily" ) option. In some embodiments, the computer system comprises a computer-readable storage medium including data encoding a value for daily option based on an underlying. The computer-readable storage medium also includes data encoding a listing date for the daily option. The computer-readable storage medium also includes data encoding both calls and puts for the daily option. The computer-readable storage medium further includes data encoding an expiration date for the daily option. The computer-readable storage medium of the computer further includes data encoding a price for trading the daily option, the price for trading being a function of the underlying. The computer- readable storage medium also includes data encoding an alpha-numeric symbol for the daily option. The computer-readable storage medium also includes data encoding a static array of strikes for the daily option. The computer-readable storage medium also includes data encoding only ATM and OTM strikes for the daily option. The computer-readable storage medium also includes data encoding daily expiration dates for the daily option. The computer-readable storage medium also includes a strike determination date for the daily option. The computer-readable storage medium also includes data encoding strike increments for the daily option. The computer-readable storage medium also includes data encoding groups of same-strike, same-type, consecutive expirations for the daily option. The computer is configured to enable execution of trades of the daily option on a platform, such as options platform, an OTC platform, or a platform especially designed for the trading of daily options.

5.3 Parameters and Properties of Daily Options

[0033] The systems, methods, software, and apparatus provided by the present invention require the electronically encoded representations of numerous variables and parameters related to daily options, such as RealDay™ options, and the computer- controlled electronic manipulation and communication of such variables, using, for example, the electronic digital hardware described above. The nature and use of such variable is describe hereinbelow.

5.3.1 Standardization

[0034] Standardized options are almost always necessary for exchange-listing. While it is possible to provide custom instruments on an exchange, the difficulty in so doing is so impractical and costly that, for all intents and purposes, truly custom exchange- traded instruments are not typically offered on an exchange. The following is a list of standardized terms for certain electronically encoded parameters and variable related to daily options. • Strike determination date

• Expiration periodicity

• Array of strikes

• Strike increment /decrement

• Strike prices

• Types (calls and puts)

• ITM, ATM, or OTM

• Listing Date

[0035] Standard daily options have a listing date approximately one week prior to expiration and would probably never be listed longer than two weeks prior to expiration. Daily options could be listed for a lengthy period prior to expiration. As those with ordinary skill in the art would understand, any listing date is keeping with the spirit of the invention. However, one embodiment is for daily options to be listed at least one month prior to expiration with the ultimate goal to list them one year in advance as market demand increases.

5.3.2 Strike Determination Date

[0036] Standard options have never discussed a strike determination date. This is because the strikes are determined upon listing. Therefore, with standard options, there is no special date in the future that the strikes are determined. In contrast, daily options will have a strike determination date after the listing date but before expiration. One embodiment would standardize the Strike Determination Date to be one trading day prior to expiration. 5.3.3 Expiration Periodicity

[0037] The expiration periodicity for daily options will be each trading day (i.e., daily).

5.3.4 Array of Strikes

[0038] The array of strikes for a standard option is variable. There is an initial listing array typically made up of a dozen or more strikes. Then, if the underlying moves through the array of all strikes, the exchange will then list more strikes. Such additional strikes are not limited. If the underlying makes very large moves, the number of new strikes could be very large as well. In contrast, daily options will have a set number of strikes in its array that cannot change. However, as those with ordinary skill in the art would understand, adding strikes after listing is possible and embodies the spirit of the invention. One embodiment is for the listing of three, four, or five calls and three, four, or five puts for each expiration day.

5.3.5 Strike Increment/Decrement

[0039] Standard options have a strike increment/decrement based on points with a base of zero. In contrast, daily options have a strike increment /decrement based on percentages with a base of the closing price of the underlying on the strike determination date.

5.3.6 Strike Prices

[0040] Standard options have strike prices determined from a multiple of the strike increment /decrement (in points) starting at, but not including, zero. Daily option strike prices are determined from a multiple of the strike increment/decrement (in percent) starting at, and including, the closing price of the underlying on the strike determination date. 5.3.7 Types (calls and puts)

[0041] Standard options and daily options will have both calls and puts.

5.3.8 ITM, ATM, or OTM

[0042] Standard options have calls and puts listed at every strike. In contrast, one embodiment will have only ATM and OTM options listed (no ITM options listed). As those with ordinary skill in the art would appreciate, not listing the ITM option is not a prerequisite to making daily options viable. It is only one embodiment that daily options would be more successful without listing ITM options.

5.3.9 Listing

[0043] Standard options and daily options will be listed for trading on an exchange where options are available for trading.

5.3.10 Forward Starting

[0044] Standard options do not have a forward starting feature. As soon as a standard option is listed it is active, moves as the underlying moves, and begins to decay (have theta). Daily options have a forward starting feature. This means that the strike prices are not determined until the strike determination date. In essence, a daily option is not active until the strikes are determined. Prior to the strike determination date, it can be said that the daily option is "dormant." We use the term dormant because in the dormant period, a daily option is not very sensitive to the underlying movement and does not decay (have theta). After the strike determination date, a daily option is now active. Daily options turn into a standard option where they become responsive to the movement of the underlying and also begins to decay (have theta). 5.3.11 Daily Expirations

[0045] Standard options with daily expiration periodicity have not met with too much success to date. As those with ordinary skill in the art would appreciate, the innovative features found in daily options with daily expiration periodicity should appeal to a host of market participants, and hence, should be much more successful than listing standard options with a daily expiration periodicity.

5.3.12 Groups or Bundles of Instruments Traded As One

[0046] Another innovative feature of daily options is when standardized sets of daily daily options are grouped together and offered for trading as if it were a single instrument. The trade will be one transaction but in the trader's account will be the individual, same-type, same-strike, consecutive-daily daily options positions. Such bundles could be grouped into weeks, months, or even a whole year. Of course, any group of two or more options can be bundled for purposes of a daily options Bundles. But, as those skilled in the art would appreciate, whole weeks, whole months, and whole years may be the most useful (but not necessarily corresponding to calendar weeks, months, or years).

5.3.13 Execution and Trading Systems

[0047] In order to trade daily options, there must be a mechanism for their execution. In one embodiment, the daily options instruments are traded using open outcry on a trading floor. In another embodiment, the daily options instruments are traded using an electronic platform. In a more specific embodiment, the present invention provides an electronic exchange comprising one or more computers in electronic communication. In a still more specific embodiment, the computers are configured to assist in generating daily options contracts, matching buy and sell orders electronically using a predetermined method in which participants willing to buy (i.e., those "going long" or just "long" ) are matched with those who are willing to sell (i.e., "going short" ) or just "short" ), and executing trades. Such aspects of the invention are described in more detail below. Those having ordinary skill in the art will understand how to design and implement such systems using the disclosure herein. Such a system provides for standardization of trading activities, allowing investors the advantages of investing with confidence in terms, conditions, and procedures that are afforded by an exchange, as opposed to the uncertainties of individual, non-standard trading practices. In still other embodiments, the exchange markets the investment products of the invention, and ensures that the participants are aware of specifications and other material aspects of the instrument. Those having ordinary skill in the art will understand how to design and implement such systems using the disclosure herein.

5.3.14 Clearing Transactions and Related Systems

[0048] In one embodiment, after an order is executed, transaction information is sent to an entity that ensures the following: that the trade was executed properly, that funds move if needed, and that all participants have the required collateral (called a performance bond) necessary to hold the position. Such activities can be incorporated into the above-described electronic trading system, as will be apparent to those having ordinary skill in the art. By way of illustration and not limitation, if the daily options price moves against the buyer, no further action is required because the position is paid for in full and the holder cannot lose more than the initial investment; any gain would be realized at liquidation or expiration. If the daily options price moves against the seller, the performance bond may be increased; the short seller may need to post additional collateral to maintain the position. The implementation of these and other details relevant to clearing trades will be understood by those having ordinary skill in the art. In another embodiment of the above-described clearing mechanism, the clearing house does not deal with each trader directly, as described above, but instead deals only with intermediaries called "brokers," who deal with the movement of funds through the clearing house. Such an arrangement makes trading a seamless and transparent process for the trader, who keeps an account with one or more brokers. This system guarantees that between every buyer and seller is a broker for each trader's account, and one clearing house between the brokers. The implementation of these and other details relevant to clearing trades will be understood by those having ordinary skill in the art. In some embodiments, the above- described activities are regulated by agencies responsible for the regulation of equities and options exchanges therefor. In the U.S., equity and equity options exchanges are regulated by the Securities and Exchange Commission ( "SEC" ); other countries have their own regulators to oversee the proper functioning of such exchanges. In other embodiments, at least some of the market oversight is delegated to one or more Self- Regulatory Organizations ( "SROs" ). The SRO is in charge of keeping the markets fair and orderly and to expel any member that materially violates any of the rules. Violation may result in loss of trading privileges; as soon as these are revoked, the trader may no longer participate in the industry on behalf of clients. If the violation rises to a criminal action, jurisdiction is moved to the appropriate authorities. In more specific embodiments involving an SRO, the exchange itself is an SROs for the products traded on the exchange. The implementation of these and other details relevant to clearing trades will be understood by those having ordinary skill in the art.

5.4 Examples

[0049] The following Examples are provided to illustrate certain aspects of the present invention and to aid those of skill in the art in practicing the invention. These Examples are in no way to be considered to limit the scope of the invention in any manner. The daily options as described herein are referred to by the trade name RealDay™ option, which can be a "RealDay™ call" or a "RealDay™ put" ; however, the use of the trade name RealDay™ in no way limits the applicablity of the examples herein to any daily option. 5.4.1 Example of Call Purchase

[0050] On Monday, a stock whose symbol is SPY is currently at 183.00. A trader wants to purchase a daily "RealDay™" SPY +0.5% call for expiration on Friday. On Monday, the trader does not know the strike price, only that the trader will get a call option whose strike price will be 0.5% above the close of SPY on Thursday. Assume that the trader is able to purchase the call today for 0.42 ($42.00).

[0051] On Thursday, SPY closes at 177.43. All RealDay™ Option strike prices (for expiration on Friday) are determined as follows:

Option Strike

RealDay™ +11 »% Call 180.09

RealDay™ +1.C )% Call 179.20

RealDay™ +01 »% Call 178.32

RealDay™ 0.0% Call 177.43

RealDay™ 0.0% Put 177.43

RealDay™ -0.5% Put 176.54

RealDay™ -l.C )% Put 175.66

RealDay™ -11 )% Put 174.77

[0052] Since the trader purchased the RealDay™ +0.5% call, the strike price is now set at 178.32.

[0053] Upon the close on Friday, if SPY has risen above the strike of the purchased call, the option expires in the money. Profits occur if the price exceeds the strike (178.32) by more than the original purchase price (0.42) less any fees. If SPY does not rise enough, the loss is limited to the original cost plus fees.

5.4.2 Example of Gaining Implied Volatility Exposure

[0054] There are many benefits to listing a daily option with a forward start feature. For example, if a trader were to enter into a position prior to expiration day and then also liquidate prior to expiration day, the predominant change in premium would be due to the changes of implied volatility during the holding period. In essence, a RealDay™ Option could act as an implied volatility futures contract.

5.4.3 Example of Gaining Implied Volatility Skew Exposure

[0055] If a trader were to enter into two same-expiration positions with different strike prices prior to expiration day and then also liquidate both positions prior to expiration day, the predominant change in premiums would be due to the changes of implied volatility skew.

5.4.4 Example of Gaining Realized Volatility Exposure

[0056] If a trader entered into ATM RealDay™ calls and puts together, with consecutive expirations, and then held through expiration of each option, the result would be realized volatility exposure.

5.4.5 Example of Gaining Standard Option Exposure

[0057] If a trader held a position on the day of expiration, he or she would receive a payoff similar to a standard option whose expiration is only one day.

6 Conclusion

[0058] The above description of the embodiments, alternative embodiments, and specific examples, are given by way of illustration and should not be viewed as limiting. Further, many changes and modifications within the scope of the present embodiments may be made without departing from the spirit thereof, and the present invention includes such changes and modifications.

Claims

What is claimed:
1. An electronic, computer-controlled system for electronically creating, recording, trading, and settling an advance-purchase, single-day option on an underlying, said advance-purchase, single-day option having an option purchase date, an option listing date, and an option expiration date, comprising: computer- compatible electronic memory including an electronically encoded representation of said advance-purchase, single-day option based on an underlying, said electronically encoded representation including an electronically encoded representation of a strike price determination date, said strike price determination date being the date that is one trading day prior to said option expiration date.
2. The electronic, computer-controlled system of claim 1, wherein said electronically encoded representation further includes electronically encoded representations of strike prices, said strike prices being based on the price of said underlying on said strike price determination date.
3. The electronic, computer-controlled system of claim 2, wherein said strike prices are based on a percentage of said price of said underlying on said strike price determination date.
4. The electronic, computer-controlled system of claim 3, wherein said strike prices are encoded as a multiple of the percentage increments or decrements of said price of said underlying.
5. The electronic, computer-controlled system of claim 4, further comprising an electronically encoded static array of said strike prices.
6. The electronic, computer-controlled system of claim 2, further including electronically encoded representations of the call strike price of said option and the put strike price of said option, wherein each of said call strike price and said put strike price is a multiple of the percentage increment or decrement of said price of said underlying.
7. The electronic, computer-controlled system of claim 2, further including electronically encoded representations of the call strike price of said option and the put strike price of said option, wherein each of said call strike price and said put strike price is equal to the closing price of said underlying on said strike price determination date.
8. The electronic, computer-controlled system of claim 1, further comprising one or more electronically encoded representations of a group of said electronically encoded options, each of said electronically encoded options being of the same electronically encoded type, having the same electronically encoded strike price, and electronically encoded consecutive, daily expiration dates.
9. A method for electronically creating, recording, trading, and settling an advance- purchase, single-day option on an underlying, said advance-purchase, single-day option having an option purchase date, and option listing date, and an option expiration date, under computer control, comprising: providing computer- compatible electronic memory including an electronically encoded representation of said advance-purchase, single-day option based on an underlying, said electronically encoded representation including an electronically encoded representation of a strike price determination date, said strike price determination date being the date that is one trading day prior to said option expiration date; and electronically operating on said strike price determination date using an computer-controlled electronic data processing device configured to execute operations in accordance with at least one of said creating, recording, trading, and settling of said advance-purchase, single-day option.
10. The method of claim 9, further comprising creating an encoded representation of a group of said options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates.
11. The method of claim 10, further comprising trading said group under computer control as a single transaction.
12. The method of claim 11, further comprising clearing under computer control each option of said group as an individual transaction.
13. The method of claim 11, further comprising trading said group under computer control in groups of a whole calendar week, a whole calendar month, a whole calendar quarter, or a whole calendar year.
14. The method of claim 11, further comprising trading said group under computer control in groups of a whole non-calendar week, a whole non-calendar month, a whole non-calendar quarter, or a whole non-calendar year.
15. A non-transitory computer-readable medium containing a computer program product for operating a computer data processing device having an operating system, said computer program product being configured to enable said computer data processing device to electronically create, record, trade, and settle an advance-purchase, single-day option on an underlying, said advance-purchase, single-day option having a option purchase date, an option listing date, and an option expiration date, under computer control, said computer program product being configured to enable said computer data processing device to perform actions comprising: providing computer-compatible electronic memory including an electronically encoded representation of said advance-purchase, single-day option based on an underlying, said electronically encoded representation including an electronically encoded representation of a strike price determination date, said strike price determination date being the date that is one trading day prior to said option expiration date; and electronically operating on said electronically encoded representation of said strike price determination date using a computer-controlled electronic data processing device configured to execute operations in accordance with at least one of said creating, recording, trading, and settling of said advance-purchase, single-day option.
16. The non-transitory computer-readable medium of claim 15, said computer program product being further configured to enable said computer data processing device to create an encoded representation of a group of said options, based on electronically encoded options of the same option type, having the same strike price, and consecutive daily expiration dates.
17. The non-transitory computer-readable medium of claim 16, said computer program product being further configured to enable said computer data processing device to trade said group under computer control as a single transaction.
18. The non-transitory computer-readable medium of claim 17, said computer program product being further configured to enable said computer data processing device to clear under computer control each option of said group as an individual transaction.
19. The non-transitory computer-readable medium of claim 17, said computer program product being further configured to enable said computer data processing device to trade said group under computer control in groups of a whole calendar week, a whole calendar month, a whole calendar quarter, or a whole calendar year.
20. The non-transitory computer-readable medium of claim 17, said computer program product being further configured to enable said computer data processing device to trade said group under computer control in groups of a whole non- calendar week, a whole non-calendar month, a whole non-calendar quarter, or a whole non-calendar year.
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