Flexible Exchange Option (FLEX)

Flexible exchange options, or FLEX options, are non-standard options that allow both the writer and purchaser to negotiate various terms. Terms that are negotiable include the exercise style, strike price, expiration date, as well as other features and benefits. These options also give investors the opportunity to trade on a larger scale with expanded or eliminated position limits.

FLEX is short for FLexible EXchange options.

FLEX options were created in 1993 by the Chicago Board Options Exchange (CBOE). The options target the over-the-counter (OTC) market of index options and provide customers with more flexibility. FLEX options now trade on other exchanges, as well as the CBOE.

Aside from allowing both the buyer and seller to customize contract terms to their liking, FLEX options provide other benefits. These benefits include protection from counterparty risk associated with over-the-counter trading. Trades are guaranteed by the Options Clearing Corporation (OCC) as are other exchange-traded options.

The market is also more competitive and transparent for increased liquidity. A secondary market allows buyers and sellers to offset positions before expiration. This secondary market removes some of the risks of trading in off-exchange markets.

A significant difference between FLEX options and traditional options is that FLEX options do not have a continuous quote stream. Therefore, the generation of a quote for FLEX options occurs only when a "request for quote (RFQ)" is made. 

In 2007, The CBOE launched CFLEX, an Internet-based, electronic trading system for index and equity FLEX options. Traders enter daily orders into the FLEX electronic book.

The minimum size for a FLEX option is one contract. Strike prices may be in penny increments and may also be in the equivalent of a percentage of the underlying stock.

Representation of premiums may be in the value of specific dollar amounts and are typically in penny increments, or in percentages of the underlying stock. 

An expiration date can be any business day and can be future-dated as far as 15 years from the date of the trade. Expiration styles may be American or European. American expiration allows for exercise at any time before the contract ends. European expiration permits exercise only at the expiration date.

Equity FLEX options, both puts, and calls, settle with the delivery of shares of stock if exercised. Index FLEX options will settle in cash.

There are no position limits for FLEX options on major market indexes, including the Dow Jones Industrial Average, Nasdaq-100, Russell 2000, S&P 500, and S&P 100. However, there are reporting requirements if position sizes exceed certain thresholds.

The position limits for broad-based Index FLEX Options, other than those listed above, are 200,000 contracts, with contracts being on the same side of the market for each given index. 

There are no position limits for equity or ETF FLEX options, although there are reporting requirements.