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Tailor-Made Combinations

Overview
The Tailor-Made Combination (TMC) Function is a new combination trade facility that enables market participants to create self-defined futures and options strategies^ through a single order. Like standard orders for options series and futures contracts, TMC orders are matched by HKATS, the trading system for HKEX's Derivatives Market, on a price/time priority basis.

^To be included in a TMC, a strategy must be on the Exchange's "List of Prescribed Strategies for Tailor-Made Combinations". 
  • Benefits of Tailor-Made Combination Function
  • Ease of Trading - users can create combinations with up to a maximum of 4 legs and place limit orders with the net prices of the combinations
  • Auto-Matching - orders for Tailor-Made Combinations will be ranked and matched by HKATS automatically according to price/time priority
  • Ability to Send Quote Requests - users can send quote requests for Tailor-Made Combinations to induce trading interests
  • An Efficient Combination Trade Facility - for options rollovers, options strategies and delta hedging
  • Applicable Products

Tailor-Made Combinations is applicable to the following markets:

  • Hang Seng Index Futures and Options
  • Mini-Hang Seng Index Futures and Options
  • Hang Seng China Enterprises Index Futures and Options
  • Mini-Hang Seng China Enterprises Index Futures and Options
  • Stock Options
  • Prescribed Strategies for Tailor-Made Combinations

The creation of Tailor-Made Combination is limited to strategies prescribed by the Exchange.  All prescribed strategies must be created in the exact form as stated in the definitions, i.e., from a buyer (long) perspective.  Seller (short) of the strategy should otherwise place a sell order.

Any Tailor-Made Combination, its related order and trade will be deleted by the Exchange if the Tailor-Made Combination is not one of the prescribed strategies or is not created as described.

  • Maximum Number of Tailor-Made Combinations Listed on HKATS per Business Day

The aggregated maximum number of Tailor-Made Combinations that can be listed on HKATS is 8,000 per business day. A limit of 800 per underlying per business day is also imposed. The Exchange reserves the right to delete any Tailor-Made Combination listed on HKATS when either limit is reached or the Exchange determines that the Tailor-Made Combination is inappropriate.

  • TMC Error Trade Related Information

Price Parameters for Error Trade Executed Through the Tailor-Made Combination Function of HKATS

The trade price of the Tailor-Made Combination trade is such that it exceeds whichever is the greater of:

  1. 30 ticks from the Notation/Reference Price of the Tailor-Made Combination trade concerned; or

  2. 10 percent from the Notation/Reference Price of the Tailor-Made Combination trade concerned.

  3.  

For the purpose of determining a Notation/Reference Price:

  1. the Exchange shall base on the average of the prices of the previous match and the next match occurring that trading day in that Tailor-Made Combination trades or if this fails to reflect a fair price or such prices are not available, the Exchange may consult up to 3 independent market practitioners who have no interest in the trade to arrive at a valid Notation/Reference Price; or

  2. if the market practitioners cannot provide a fair price of the Tailor-Made Combination trades concerned, the Exchange shall obtain the Notation/Reference Price* of each individual leg consisted of the Tailor-Made Combination trades in accordance with the Error Trades Rules for the respective HKFE product or Stock Options executed through the Central Order book, then the Exchange shall calculate the fair price of the Tailor-Made Combination trades concerned.

  3.  

Parameters may be revised by HKEX in which case Participants will be notified before the change takes effect.

*Notation Price for Futures and Stock Index Options Contracts

  1. The notation price for futures contracts shall be obtained in the following order:

    1. last traded price within 5 minutes prior to the Error Trade;

    2. the mid-point of the best bid/ask price immediately prior to the Error Trade;

    3.  

    4. last settlement price; or

    5. the difference of notation prices between the related outright contracts (calendar spread only).

    6.  

  2. Determination of the notation price of the Stock Index Option Contracts will be based on the followings:

  3.  

    1. The average of the prices of the previous match and the next match in that option series occurring reasonably close to the time of error trade. If this average price fails to reflect a fair price, the notation price will be determined on the basis of item (ii) below.

    2. The reasonable bid and offer prices available around the time of error trade, unless in the sole discretion of the Exchange, this fails to reflect a fair price, in which case the Exchange may consult up to 3 independent market practitioners who have no interest in the trade in order to arrive at a valid notation price.

    3.  

    Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the notation price.

  4. Notwithstanding the above, the Chief Executive of HKFE or his designee may adopt such other price to be the notation price as he considers appropriate, taking into account the market conditions prevailing at the time of the Error Trade.

 
*Reference Price for Stock Options Contracts
 
Determination of the Reference Price will be based on the average of the prices of the previous match and the next match occurring that trading day in that option series unless in the sole discretion of the Exchange, this fails to reflect a fair price, in which case the Exchange may consult up to 3 independent options market practitioners who have no interest in the trade in order to arrive at a valid Reference Price. Notwithstanding the foregoing, the Exchange shall have absolute discretion in determining the Reference Price.
     
For details, please refer to HKFE Rule 819B under Rules of the Futures Exchange for Futures & Index Options and Options Trading Rule 540 under Options Trading Rules of the Stock Exchange for Stock Options.

List of Prescribed Strategies for Tailor-Made Combinations

Strategy Types
Definitions
Call Calendar Spread
Sell a near month call and buy a far month call at the same strike
Put Calendar Spread
Sell a near month put and buy a far month put at the same strike
Risk Reversal
Buy a call and sell a put at lower strike of the same maturity
Call Spread
Buy a call and sell a call at higher strike of the same maturity
Put Spread
Buy a put and sell a put at lower strike of the same maturity
Call Diagonal
Sell a call in near month and buy a call in far month at a different strike
Put Diagonal
Sell a put in near month and buy a put in far month at a different strike
Synthetic Futures
Buy a call and sell a put at the same strike of the same maturity
Straddle
Buy a call and a put at the same strike of the same maturity
Strangle
Buy a put at lower strike and buy a call at higher strike of the same maturity
1 x 2 Ratio Call Spread
Buy a call and sell two calls at a same higher strike. All options involved have to be of the same maturity
1 x 2 Ratio Put Spread
Buy a put and sell two puts at a same lower strike. All options involved have to be of the same maturity
Call Ladder
Buy a call, sell a call at a higher strike and sell a call at an even higher strike. All options involved have to be of the same maturity
Put Ladder
Buy put, sell a put at a lower strike and sell a put at an even lower strike. All options involved have to be of the same maturity
Straddle versus Call
Buy a call and a put at the same strike and sell a call at a different strike. All options involved have to be of the same maturity
Straddle versus Put
Buy a call and a put at the same strike, sell a put at different strike. All options involved have to be of the same maturity
Call Butterfly
Buy a call, sell two calls at a same higher strike and buy a call at an even higher strike. All options involved have to be of the same maturity
Put Butterfly
Buy a put, sell two puts at a same higher strike and buy a put at an even higher strike. All options involved have to be of the same maturity
Iron Butterfly
Buy a put, sell a call and a put at a same higher strike and buy a call at an even higher strike. All options involved have to be of the same maturity
Call Condor
Buy a call, sell two calls at higher different strikes and buy a call at an even higher strike. All options involved have to be of the same maturity
Put Condor
Buy a put, sell two puts at higher different strikes and buy a put at an even higher strike. All options involved have to be of the same maturity
Iron Condor
Buy a put, sell a put at a higher strike, sell a call at a further higher strike and buy a call at an even higher strike. All options involved have to be of the same maturity
Box Spread
Buy a call and sell a put at the same strike, buy a put and sell a call at a same higher strike. All options involved have to be of the same maturity
Calendar Spread for Prescribed Strategies
Buy any two-legged prescribed combination in far month and sell the same combination in near month
Delta Neutral Combinations
Buy single call option, single put option, Call Spread, Put Spread, Straddle, Strangle, Ratio Spread or Risk Reversal while sell or buy the related underlying futures

Buy a call and sell a put at lower strike of the same maturity
Buy a call and sell a put at lower strike of the same maturity
Buy a put and sell a put at lower strike of the same maturity

Important Note

Except for Box Spread, all other strategy trades with the values of the positions at expiration independent of the value of relevant underlying instrument are not acceptable.  An example is to buy a synthetic futures (buy a call option and sell a put option at a same strike) and simultaneously sell a futures. Any Tailor-Made Combination, its related order and trade will be deleted by the Exchange if the Tailor-Made Combination is not one of the prescribed strategies or is not created as described.

Updated 06 Nov 2017

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