CA2265963A1 - Apparatus and process for transacting an expirationless option - Google Patents

Abstract

A system and process for use in transacting an expirationless option on a particular asset. A user using a video display (220) is prompted to input data representative of a particular asset, the option type, an exercise price, the current price, the historic price volatility and the margin requirement for the particular asset. These data may be also obtained from a data source (130) and are later stored in a storage medium (250 or 350). These data are used in an algorithm for obtaining the option premium data for use in transacting the expirationless option.

Description

CA 0226~963 1999-03-17 APPARATUS AND PROCESS FOR
TRANSACTING AN EXPIRATIONLESS OPIION

BACKGROUND OF THE INVENTION

Terhnir~l Field The present invention relates generally to an a~pa~dlu~ and process for ~ulu~ ir~lly tr~n~rting an expirationless option for use in a variety of markets, such as commodities or securities ~

I)~ of the Prior Art An "option" is generally used to hedge risk by providing the right to purchase or sell a cornrnodity or other asset at a later time at a set price with only limited obligations.
An option is similar to an ill~uiance policy in that it insures that an asset may be purchased 20 or sold at a later time at a set price in return for a ple,lliu.ll, often referred to as an option prell,iu"l, which is generally a relatively small percentage of the current value of the asset.
A first type of option, referred to as a "call" option in the securities market, gives the purchaser of the option the right, but not the obligation, to buy a particular asset at a later time at a ~ua~ leed price, often referred to as the "exercise price." A second type of 25 option, referred to as a "put" option in the securities market, gives the pulchaser of the option the right, but not the oblig~tio~, to sell a particular asset at a later time at the exercise price. (The "put" option may be thought of as giving the owner the right to "put"
the securit,v into another's name at the exercise price.) In either ~ re, the seller of the call or put option is obligated to pe,rol", the associated transactions if the purchaser 30 chooses to exercise its option.

For rnany years, options have been utilized in a variety of asset-based tr~n~ctiorl~.
For exarnple, in the comm~ tieS market, commndity producers (e.g., farrners) often enter into option relationships with comrnodity users (e.g., m~mlf~rtllrers) and speculators; in the CA 0226~963 1999-03-17 real estate market, real estate owners often enter into option relationships with real estate ~ulchasels; and in the securities market, security holders often enter into option relationships with security ~u~chasel~.

In an illustrative example for the commodities market, a commo~ity user (e.g., acereal m~nllf~rhlrer) which expects that it will need a certain amount of particular cnmmo~ities (e.g., corn and wheat) at a later time (e.g., in six months), may purchase a "call" option from a speculator. In return, the speculator receives the option p~ lium in return for obligating itself to obtain and sell the set amount of corn and wheat at the exercise price six months from the time the option was granted.

Accordingly, if the price of these commodities increases over the six month period, then the cereal m~mlfartmer will likely exercise the "call" option and obtain the set amount of commodities from the seller at the guaranteed exercise price. Therefore, by paying the option premium in advance of knowing the actual value of the commodities six months later, the cereal m~nllf~rtnrer may save itself a substantial amount of money, especially if the price of corn or wheat has suhsl~ lly increased over the six month period due to a number of reasons (e.g., bad weather). Of course, if the price of these commo~ ies does not reach the exercise price over the six month period, then the cereal m~nllf~ctllrer simply will not exercise its option and will purchase the commodities on the open market at the then going price.

On the other hand, farmers who plant their fields many months in advance of having a comm- riity ready for delivery and wish to ~ua~ e Ih~ lsel~es a set price for their commo~lity at a tirne in the future may l~u,chasc a "put" option from a speculator. Here, if the price (value) of the farmer's cornm~ hies goes down over the set period of time for a variety of reasons (e.g., exceptionally good crops among farmers), in return for the option pr~lllium, the farmer is ~u~l~ed that it will receive a set amount of ,u;.~i.,....~l income for his efforts from the speculator.
The most frequent use of options is in the securities market, where millions of options are typically tr~n~rte~l on a daily basis. In the securities market, investors may .. .. ... .. ~ . , . . . ~ ., ~ ... ... .. . ...

CA 0226~963 1999-03-17 W O 98/12658 PCT~US97tl6560 hedge the risk related to investing in securities aecoci~te~l with stocks in coll~anies, bonds, cQrnmrJtliti~s, real estate and many other assets.

- Of ih~ol~,ce, the common ~le-~n",;"~lQl among the variety of prior art systems for 5 l~ s~CLi-~g asset-based options are that they are only capable of ll.~n~ae~ g options which expire after a certain period of "time". In other words, the purchaser of the call or put option using the prior art systems for h~nr~ling option ~ saclions only has the right to exercise its option before it expires or on the expiration date.

As shown in FIGS. 8-11, for a set period of time, an option llr~n~ lrr~ using a prior art system has some value associated with it depending on the type of option, the current value of the asset relative to the exercise price and other variables. However, the moment after the option expires, a purchased option, as shown in FIGS. 8 and 9, is worthless causing an option purchaser who may have owned a valuable option one day to own a 15 worthless option the next day. Furthermore, not only is the option worthless, hut the purchaser of the call or put option is no longer protected against future price fluctuations ~CSoci~t~d with the asset. On the other hand, as shown in FIGS. 10 and 11, a sold option, which might be falling in value, ~lltom~tir~lly rises to the value of the option ~)lt;llliUI~I and removes all future risks to the option seller the mnm~nt after the option expires.
Ignoring the effect of "time" and other nominal costs associated with tr~n.c~cting options, the value of the options on the Coca-Cola shares may increase or decrease based on the current price of the shares. For example, if the current share price rose from $50 to $54, then the value of the ~ulchased call option (FIG. 8) would increase because it would 25 be more likely to be exercised at the $55 per share exercise price. Further, if the current share price rose to $60, then the value of the ~ chased call option would increase even more because the owner of the ~uulchased call option could now pùlchase Coca-Cola shares at the exercise price of $55 and sell them for $60 on the open market resulting in a $5 per share profit. Moreover, the value of the ~ulchased call option would continue to hlc.ease 30 if the current share price of the Coca-Cola shares co~tinlled to rise higher and higher.
Accordiugly, as long as the current price of the asset (the Coca-Cola shares~ continues to increase, the profits associated with the return on invesllllenl for a ~uul~;hase, of a call ,, CA 0226~963 1999-03-17 option are unlimited. However, as might be expected, the exact opposite results for the seller of the call option (see FIG. 10) in that the losses all-ibuled to the seller of a call option are lmlimited.

On the other hand, co~ g to ignore the effect of "time, " if the current share price dropped from $50 to $45, then the value of the purchased call option would decrease because it would be less likely to be exercised at the $55 per share exercise price.
Moreover, as the current share price dropped further, the purchased call option would be even less likely to be exercised. However, unlike the situation above where the value of 10 the purchased call option co~ d to hlclease as the current share price increased, for a purchased call option ~csoci~t~d with an asset which decleases in value, the maximum loss associated with the return on hl~c~ elll is limited to the option prcll~ l (for this example, $5 per share). Again, the exact opposite results for the seller of the call option in that the profits realized by the seller of a call option are capped at the option prcl..iulll.
Referring to FIGS. 9 and 11, similar yet opposite results may be realized by thepurchaser and seller of a put option, le~l,ecli~ely, using a prior art system for tr~n.~rting options. Here, assume that investor P purchases a put option from investors who sells the put option on shares of Coca-Cola with an exercise price of $45 in six months in return for 20 an option ~Ic-lliull- of $5 per share.

Here, again ignoring the effect of "time or other nornin~l costs, " if the value of the Coca-Cola shares fell to $46, then the value of the purchased put option (FIG. 9) would increase because it would be more likely to be exercised. Moreover, if the value of the 25 shares continued to fall to $40, then the value of the ~ul~,hased put option would increase even more because the owner of the ~u~chased put option would be able to obtain shares of Coca-Cola at a price of $40 per share and sell these same shares at $45 per share by exercising its put option resulting in a $5 per share profit. A~cordin~,ly, as long as the current price of the asset (the Coca-Cola shares) continue to decrease, the profits associated 30 with the return on invesl~lle.ll for a l~ulcllasel of a put option are limited to the exercise price (less the option pl~.~~iulll paid) if the asset price fell to zero. However, the seller of the put option (See FIG. 12) realizes potential losses equal to the exercise price (less the CA 0226~963 1999-03-17 option ~lClJliUlll received) if the asset price fell to zero.

On the other hand, if the current share price increases, then the value of the purchased put option would decrease because it would be less likely to be exercised.
5 However, regardless of how much the share price increased, the maximum loss ~csoci~t~d with the return on in~.,sLll,clll that the purchaser of a put option would realize is limited to the option plC;llUUIII. In contrast, the seller of the put option realizes a rn~xi~ ---- profit of the option prellliulll.

Based onthe above exarnples, it should be readily ~arent that, ignoring "time,"
the purchaser of a call or a put option using a prior art system for l1AI~C~ 1g an option may essentially realize an llnlimit-od gain while limiting his or her potential loss to the amount of the option l"e,lliulll. On the other hand, the seller of a call or a put option using the prior art system simply acts as an insurer for a period of "time" by collecting the option premium 15 in return for insuring that the pulchasel of the option will be able to buy or sell, respectively, the underlying asset at the exercise price for a certain period of "time."

However, the problem with such prior art systems is that "tirne" cannot be ignored.
Specifir~lly, such prior art systems limit the purchaser to purchasing call and put options 20 only for preset inclelllenl~ of "time" which may or may not be a suitable amount of time to protect the purchaser and which leave the purchaser with a valueless asset after the preset ~C1C111e11~ of "time" expires.

Specifi~lly, lefe,li~g to the arrows pointed do~llwald in FIGS. 8 and 9, even 25 though a ~ulchased call option may hlcl.,ase or a pur~hased put option may decledsc in value as the current price of the asset increases or decreases, Ic~.~eeli~ely, the value of the call or put option whose current price has yet to reach the exercise price must always battle "time." In other words, the closer that the call or put option gets to its expiration date, the more "time" will have a negative effect on the value of the puichascd call or put option 30 because "time" will be running out for the current price of the asset to reach the exercise price. Furthc,lllole, if the current price of the asset on the expiration date is below the exercise price for the l~ul~hased call option or above the exercise price for the l~ul~hased CA 0226~963 1999-03-17 Wo 98/126S8 PCT/US97/16560 put option, then, regardless of the current price, tne option holder will (1) be left holding an option worth absolutely nothing and (2) be left unprotected in its efforts to buy or sell a particular asset at a later "time."

S Therefore, a need exists for an ~palalus and process for l~n~A~-L;"~ an option which is not ~epen~lent on "time. " In other words, a need exists for a system which transacts an expiratiomess option.

Of note, experts in the securities market and other markets dealing with optionshave conrlll(led for many years that any system for tr~nc~cting an option can only generate an option p~ ~iu~ll, which is fair to both the l ulchase[ and seller of the option, if data representing the "time" in which the option expires is input into the system. More specifically, all algo~ s that have been derived for gen~ldli~g fair option p.~l-liu..ls include a variable for "time". Such algoliLIlllls include the Black-Sholes, Binomial Pricing 15 and Analytic Approximation algo.iLIIlll3.

Moreover, not only is there a need for a system capable of tr~n.c~rting a fairlyc~lc~ t~l prellliull- for an option not dependent on "time," but there is a further need for such a system to ~ntolll~lir~llyLlailsa~L pulchases and sales of expiratio~ess options 20 i~ "l;1nrously while h~n~lling (1) the constantly rh~nging current asset prices and other variables associated with the option pre.lliulll pricing and (2) the high volume (millions) of daily options tr~nc~eted in the securities market and other m~rk~tc.

The above-r~enced sholLco,-,il~, and other sholLco~ lg of the prior art systems 25 for tr~nc~rting options that expire are effectively o~ircollle by the present invention, as described in further detail below.

... . . . . ..... ......

CA 0226~963 1999-03-17 WO 98112658 PCTtUS97/16560 SUMl\~ARY OF THE INVENTION

In accordance with the tP~c~ling~ of the present invention, a new C~ ul~1~ed system for tr~n.C~ctine expirationless options is provided. The present invention is S particularly useful for tr~nC~rtin~ expirationleSs options in the securities market, but may be utilized in a variety of other asset-based I~ el~.

The pc1r l,ll~ce of the present invention is made possible by the exi~tçnre of margin positions, which are prevalent in the securities market. A margin position is a 10 means for an investor to purchase the right to a particular asset (e.g., security) for an indefinite (~h~Lionless) amount of time without having to pay the entire value of the asset at the time of purchase.

An investor ~u-chases the right to the particular asset by opening a "long" margin l5 position or a "short" margin position. A long margin position (also referred to as a conditional purchase) is opened when the investor expects the value of the asset to increase, and a short margin position (also rer~l1ed to as a conditional sale) is opened when the investor expects the value of the asset to decrease.

As shown in FIG. 12, a long margin position investor realizes a ROI equal to thecurrent value of an asset when the investor closes the margin position less the value of the asset when he opened the margin positioned. Thc.~rore, if the value of an asset increases from $20 to $30, then the long margin position investor realizes a $10 profit when it closes the margin position. However, if the value of the asset decleases to $5, then the same investor realizes a $15 loss.

On the other hand, as shown in FIG. 13, a short margin position investor realizes a ROI equal to the value of the asset when the investor opened the margin position less the value of the asset when it closes the margin position. Therefore, if the value of an asset decreases from $20 to $5, then the short margin position investor realizes a $15 profit when it closes the margin position. However, if the value of the asset increases to $30, then the same investor realizes a $10 loss.

CA 0226~963 1999-03-17 Wo 98/12658 PCT/USg7/16~60 A margin re4uile,llcnt, çspeci~lly in the securities market, for a particular asset is typically subst~nti~lly higher than an option prc.lliul~l for an exyilillg option on the same asset as described in the Background of the Invention. One reason for tbe subst~nti~l S difference belween the margin requirement and the option yl~ll~iulll for an expiring option is that the entity (e.g., eXc~nge or broker) offering the margin position ess~nti~lly a~s~m~s more risk because, unlike the expiring option, the margin position does not ~ltom~tir~lly expire after a preset period of "time," (unless, of course, the underlying asset expires, such as a futures or comm-~ity contract).
Since any expiring asset must be a derivative or represent a contingent claim, the margin position is ~s--m~(l to be on the base or be a non-expiring asset. In the case of a futures contract on corn, though the margin position is actually for the futures contract which will expire, this margin re~yuuG~ llL can be demonstrated to actually repl~sent the 15 margin re4uile.ll~.lt for the corn, or base asset, as well. In the prior art, a change in the futures contract is accomplished by "rolling over", or e~ch~nging one contract for another to m~int~in the maximum future date of delivery or sale. The present invention will make this nnnrceSS~ry~

Additionally, since, unlike an option ple.lUUlll, the margin requirement is ecsçnti~lly refundable to the investor of a margin position because the margin requirement is applied to the yulchase price (current value) at the time the investor of a margin position closes the margin position, entities lc~yol~ible for reg~ ting margin positions (nn~cientifir~lly) select a margin re4uir~lnclll b~l~nr-ing the ~em~n~l of investors, spec~ tors and hedgers with the protection of the lcspe~;live market from default risk. These entities typically present margin re4uilcll~ either as a fixed dollar amount (margin amount) associated with a particular asset or a fixed pcicenlage (margin ~elce.lL~ge) of the current price (value) of the particular asset.

The present invention takes advantage of the inefficiency ~soci~te~l with the nn.~cientifir~lly selected margin re4uilelll~.,L~. More specifically, the present invention is able to combine the expirationless feature of the margin position and the limited risk of the . . . . , .. ~ . ~ .

CA 0226~963 1999-03-17 eA~ilillg option by recognizing that, because the margin requirement is nn~Ci~ntifir~lly selecte~ a price (an option prell~iulll) exists that would cause many dealing in margin positions and expiring options to find great benefits in ~ E expirationless options.

The present invention takes advantage of the lln~cientifir~lly (imperfectly) selected margin Ic.luire,l,ellls by recognizing a particular relationship bcl~eell margin positions and options. As shown in FIG. 14, a long margin position is equivalent to a purchased expiring call option and a sold expiring put option when the effect of "time" is discoul,led.
Additionally, as shown in FIG 15, a short margin position is equivalent to a sold expiring call option and a purchased expiring put option. In sum, if the effect of "time" is discounted, an entity allowing an investor to open a margin position (e.g., a long margin position), is in the same position that it would be if it simply allowed an investor to purchase an expiring option (e.g., a call) and sell an expiring option (e.g., a put).

A significant feature of the present invention is that it is able to discount the effect of "time" to allow a margin position to be equivalent to a ~uicllased and sold option, as described above. Specifically, the present invention is able to utilize any one of the ml-ltitllde of expiring option algorithms for determining fair expiring option premiums, as mentioned in the Background of the Invention, to discount the effect of "time."
All expiring option ple-lliulll algorithms, in addition to inrl~l-ling a "time" variable, include readily observable variables, such as the current value (price) of the asset, the historic price volatility of the asset (the standard deviation of the asset's historic price movement) and the current risk-free interest rate (the rate of return without default risk, such as a U. S. govcl,ll~enl T-Bill rate). Further, all expiring option ~rellliuln algorithms include variables for the exercise price. Accordingly, the present invention uses the expiring option p~ uulll algoliL}ulls to discount the effect of "time" accoldillg to the following process: (1) the exercise price is set equal to the current price of the asset and (2) the option ~lcllliunl is set equal to the margin requirement for the asset. The present invention then uses the expiring option pl~ ~ll algorithm to gell~dle the all~icil,dl~d point in "time" (implied time) in which an expiring option would expire if the pulcllaser paid an option premium equal to the unscientifi~lly set margin requirement of the asset and if the CA 0226~963 1999-03-17 Wo 98/12658 PCT/US97/16560 exercise price was equal to the current asset price (as it is for a margin position at the momPnt it is opened).

The present invention utilizes the above process because the exercise price is always 5 equal to the current asset price at the moment when the margin position is opened, and this is the point in time when an investor of a margin position would gladly pay an inflated option pr~l~uul~l equal to the margin position re~luil~.l.c..l to limit his risk. Accordingly, the present invention is able to discount "time" to price a pu-cllased and sold option such that they are equivalent to a rnargin position at the point where the asset price is ~u~-.Pd 10 equal to the exercise price.

After the implied time value is gene.~led, the present invention sets the time value in the expiring option ~l~,miUlll algorithm equal to the implied time value. The present invention then generates an expirationless option ~ llliUlll based on the particular exercise 15 price selected by the investor.

The present invention may be implemPnt~d on a vast variety of computer systems.
More particularly, the present invention employs a ColnlJul~n system to receive and store data representative of the particular asset, a type of option (call or put), a requested 20 exercise price and the mnltitllde of other variables related to tr~n~rting an expirationless option on the asset. Then, responsive to the data received, the present invention uses the cc,...l,ulel system to gen~l~t~ data representative of an expirationless option plellliulll, and to transact the expirationless option using the expirationless option ~re...i~...l.

In use, when a user wishes to purchase or sell an expirationless option, the user is plo.... ...~Led to input data r~ples~,l-taLi~e of the asset, the type of option and the requested exercise price for the asset, into a keyboard or other means of the COlll~ul~l system. The appOI~lus and process of the present invention then prompt the user to enter certain other data related to ~ c~ g an expirationless option on the asset. The certain other data in~ln(les the current price for the asset on the open market, the historic price volatility of the asset, the current risk-free interest rate and the margin re4uile~ ,nl associated with the asset. Rec~ e this data typically changes frequently, the present invention may CA 0226~963 1999-03-17 WO 981126S8 PCT/US97tl6560 alternatively receive this data from one or more data source (e.g., a rl~t~ ~ce or real-time ~uote service such as S&P ComStock), co~ccled to the cc,~ ,ul~l system of the present invention. After all of the data is received, it is stored on a storage m~inm of the conll)ule, system.

The present invention then uses one of the expiring option pl~llliulll algolilhn,s to generate the data reples, lllali~e of the expiration1ess option prc,lliwll. More specifically, the present invention tel~ ldlily sets the option ~rel~ lll variable of these algoli~ulls to the margin Ic~luilcl-.ent data, tclll~Olalily sets the exercise price variable of these 10 algolillulls to the current asset price data and geneldlcs data for the implied time of these algolilLu..s. The present invention then uses the implied time data and the exercise price data input by the user to gcneldle the data for the option pl~llliwn variable of these algorithms.

The option prcllliuln data g~ al~d is the expirationless option premium used to transact the expirationless option for the particular asset. Accordingly, the option prellliul,.
data is output for use in completing the expirationless option tr~n~acti-)n The present invention is particularly important to those who wish to protect themselves against price swings for indefinite periods of "tirne." In other words, individuals and entities may now concern themselves solely with the future price of an asset, and cease concerning themselves with the se~tning1y impossible task of pre(~irfing the "time" in which the asset may hit that price.

For exarnple, a cereal m~nuf~r,tl1rer whose cereal prices to its c~ s depend ~ignifir~nt1y on the price in which they are able to purchase wheat, can now better assure their c1~stomPrs of steady cereal prices by ~wchasing an expirationless call option using the present invention. More specifically, the cereal m~m1f~rfl1rer can now ensure itself that it may continue to purchase wheat at or below a certain price (the exercise price), regardless of the "time" in the future when the price of wheat rises above the exercise price.
Referring to FIG. 16, by ~tili7ing the present invention, in return for the option ~rc...iwll, the cereal m~m1facfl1rer is able to purchase an expirationless call option which has unlimif~c~

CA 0226~963 1999-03-17 WO98/126S8 rcr/uss7ll6s6o upside potential, limited downside potential (the option IJiell~iulll) and never becomes worthless.

On the other hand, a farmer whose family depends on being able to sell his entire S crop of wheat for a set .~ .. price would benefit signifir~ntly. Specifically, the farmer who was unable to predict whether wheat prices might drop next year or in five years may purchase an expir~tinnless put option using the present invention to ensure that his wheat will be ~ulchased at a certain price (the exercise price) regardless of the "time" in the future when the price of wheat drops below the exercise price. Referring to FIG. 17, by 10 utili7in~ the present hlv~,nlion, in return for an option p~GllliUlll, the farmer is able to purchase an expirationless put option which has llnlimited upside potential, limited downside potential (the option plelluulll) and never becolnes worthless.

Another aspect of the present invention is that it is capable of h~n(~lin~ constantly 15 ch~nging current asset prices and other variables associated with ~ aling the option lUUl~l price and tr~n~rtin~ the expirationless option. As described above, by using one or more data source, data from a variety of places, regardless of location, may be cQ~ nly updated and stored for use in ge~e~aLil1g the option premium price at any given momPnt in time.
A further aspect of the present invention is that it is capable of autom~tir~lly and essPnti~lly ir..~ -Pously L~ c~ an expirationless option in the securities market and other lllcuk~L~, throughout the world. This is especially i~llpol.~ll in the securities market because million~ of option COllllaCI~, are typically tr~n~aete(l daily. This feature is also 25 important bcca-lse of the volatility of the v~ria~lcs used to g~ ,late the option pr~n~iulll price. This makes the eSsenti~lly ;~ QUS Ll~s~c~ n capability illll,c.aLi~re, especially in the securities m--arket.

A yet further aspect of the present invention is that it is capable of h~n~lin~
30 extinction bands. An çxtinrti~n band is a price higher than the exercise price for a put option and lower than the exercise price for a call option. The extinrtion band price is selected because a particular entity ~~ponsible for exch~nge management may wish to WO 98/12658 pcTluss7ll656o imp}ement expiratiomess options without significantly increasing record-keeping re~luilc~ ,nls for the respective exch~nge. By introducing extinction bands, or forced closure of an expirationlPs~ option based not on tirne, but on the f'li~t~n-~e of the exercise price from the current asset price, an exchange may retain the aforementioned benefits of 5 eXpir~tif)nlf~ss options for their ll~clllbers without significantly hlcleasillg record keep~ng le.luitelll~.lls. The pricing algorithm for this variant of the expirationless option ~Csl~m~s that both the band, the maximurn ~ e of the exercise price from the asset price and the extin~tif-)n date (or the effective date of meas,llclllent of the exercise price from the current asset price) for these options is known. If these variables are not known, then the 10 expiratiomess option with extinrtion bands is priced exactly as the expirationless option without extinction bands.

The al~iemellLioned and other aspects of the present invention are described in the detailed description and ~tt~ched illustrations which follow.

CA 0226~963 1999-03-17 Wo 98/12658 PCT/US97/16560 BRIEF DESCRIPI ION OF THE DRAWINGS

FIG. 1 depicts a diagram of a plcr~l-ed co~ L~l system for implementing the present invention.
FIG. 2 depicts components of an end user workstation for the co-l,~ul~l system of FIG. 1 for ~mpl~ ;--e the present invention.
FIG. 3 depicts co.~-l)oncnts of a server for the c~ uL~l system of FIG. 1 for imple.-~ g the present invention.
FIG. 4 depicts a flow diagram of a pler~ ,d embodiment for the Main Module of the present invention.
FIG. 5 depicts a flow diagram of a plerel.ed embodiment for the CALC module of the present invention, which calculates the expirationless option ~)lellliUlll ignoring extinction bands.
FIG. 6 depicts a flow diagram of a l,rere..ed embodiment for the DATA_ENTRY
module of the present invention, which proml)t~ the user to enter certain data for tr~n.cactine the expirationless option.
FIG. 7 depicts a flow diagram of a pler~ d embodiment for the CALC_E module of the present invention, which calculates the expirationless option prernium with extinction bands.
FIG. 8 depicts a graph which illustrates the potential Return on Investment (ROI) versus the Value of an Asset (Asset Value) for a purchased expiring option tr~ncacte~ on a prior art system.
FIG. 9 depicts a graph which illu~L~dles the potential ROI versus the Asset Value for a ~wcllascd expiring put option tr~ncacted on a prior art system.

2~ FIG. 10 depicts a graph which illustrates the potential ROI versus the Asset Value for a sold expiring option tr~nc~cted on a prior art system.
FIG. 11 depicts a graph which illustrates the potential ROI versus the Asset Value for a sold expiring put option tr~nc~cted on a prior art system.
FIG. 12 depicts a graph which illustrates the potential ROI versus the Asset Value of a long margin position.
FIG. 13 depicts a graph which illustrates the potential ROI versus the Asset Value of a short margin position.

W O 98tl26S8 PCTAUS97/16560 FIG. 14 illustrates the equivalent re!~tion~hip between a long margin position and a ~ul~;hascd ca}l expirationless option (expiring option with time discounted) plus a sold put expirationless option (expiring option with time discounled).
FIG. 15 illu~ Lcs the equivalent rel~tionchip between a short margin position and a S sold call e~haliouless option (expiring option with time discounted) plus a purchased put expirationless option (~hillg option with time discounled).
FIG. 16 depicts a graph which illustrates the yc l~ ial ROI versus the Asset Value of a purchased call eXpir~tioni~cc option l,i,l~c~te~l using the apl~alalus and process of the present invention.
FIG. 17 depicts a graph which illustrates the potential ROI versus the Asset Value of a ~urchascd put expirationless option ll~ acled using the ~yaldLus and process of the present invention.

CA 0226~963 1999-03-17 W O 98tl2658 PCTrUS97/16560 DETAILED DESCRIPrION OF l ~l~ INVENI ION

The ~ Lus and process of the present invention may be i~ on llUlllC~ U~ types of col-l~uler systems, but is preferably implem~ntP~l on a client/server network 100 as shown in FIG. 1. The client/server network 100 inrln-les a server 110 co~ P~l~l to a plurality of clients 120, also known as end-user wolh~l~tions, and a data source 130 running on a token ring envilomll~L.

As shown in FIG. 2, each end user workstation 120 preferably inrludes a 10 microprocessor 210, a video display 220 (e.g., a CRT projector or monitor), a keyboard 230, a mouse 240, a printer 260, and a storage mP~i--m 250 (e.g., a disk array, tape, optical drive, tape drive or floppy drive). The end user workstations 120 may be an IBM
compatible PC, laptop, or pen colllpul~l running Microsoft Windows 95 or its equivalent.

As shown in FIG. 3, each server 110 preferably includes a microprocessor 310 anda storage mP~ m 350. The server may use Microsoft NT or peer-to-peer with one peer de-lir~ted as a server or their equivalent.

Data sources 130 may be a Quotron system or its equivalent, which may regularly 20 receive data via satellite co~ ions 135, land line connections (e.g., a modem) 137 or the like. However, any other source capable of receiving and providing data relevant to tr~n~rting the expirationless option may be used in the present invention.

The ~,rer~ ,d client/server network of the present invention is a Windows NT PC
25 LAN. Though these are the pref.,.led clients, servers, and client/server n~,lwol~, as may be ap~ ,ciated by one of oldillaly skill in the art, suitable equivalents may be used.

The following flow charts depict the operation of the present invention. In a pler~,~led embodiment, when a user wishes to ~ulchase or sell an expirationless option 30 related to a particular asset, the user may view the video display 220 of the end user wo.k~lion 120 to obtain instructions on how to transact the expirationless option contract.

CA 0226~963 1999-03-17 Wo 98/12658 PCT/US97/16560 Referring to FIG. 4, at step 410 of the Main Module, the individual is p~o~ Led by the video display 220 to indicate when the user is ready to transact the expirationless option. By pressing the ENTER key on the keyboard 230 or clicking on a START box on S the video display 220 with the mouse 240, the present invention starts its operation of Ll,.nc~ ing the expir~tionl~S~ option by proceeding to step 420. For simplicity purposes, it may be ~c~um~d that the rnicloplucessor 210 of the end user wo~k~lalion 120 and the microprocessor 310 of the server 110 coordhl~t~ all tasks of the end-user wo,k~L~Iion 120 and server 110 of the c(,ll,l,~ler system, les~e.;li~ely, and all tasks between the two.
At step 415, the video display ~ro,llpt~ the user to input data representative of a particular asset. Upon receiving the data leplesellLalive of a particular asset, the present invention proceeds to step 420.

At step 420, the video display 420 plLln~L~ the user to select which option pricing algorithm he or she wishes to use to transact the expirationless option. Such algolilhllls include, but are not limited to, the Black-Sholes, the Binomial Pricing, the Finite Dirrelence and the Analytic Approximation al~o~ lls. These algoliLl~lls are widely used in conn~ction with d~Lelll~i~ g expiring option plellliullls and are available in both 20 pluplieLaly and shareware software from MollLgolllcly Investment Technology, which provides a price r~lr~ tor to anyone with Internet access as well as extensive and rapid option pricing algol iLllllls. The option prices provided in this detailed description were ~l~(e ...;nfd using this free Int~rn~t service, and d~mon.~trate that any option pricing algorithm may be used to del. lmillc expirationless option prices. For example, the Black-25 Sholes algorithm is:

~ .. . , . ~ . ..

CA 0226~963 1999-03-17 Wo 98/12658 pcTluss7ll656o Where: c-- OPT?REM = the option prc,.. liulll S = ASSET_PRICE = the current price for a particular asset X = X?RICE = the exercise price r = T_BILL = the current risk-free interest rate S ~ = VOLATLTY = the ~dard deviation of the historic asset price movelllc"l collllllollly referred to as the asset's volatility T = the time until expiration (for an expiring option) 10 In another example, the Binornial Pricing algorithm is:

Where: c = OPT_PREM = the option prellliulll S = ASSET_PRICE = the current price for a particular asset K = X?RICE = the exercise price r = T BILL = the current risk-free interest rate n = the number of periods (the time) until expiration (for an expiring option) p = r - d u -d u = ~,.i,.;"-,-"- value of an upward movement in the price of the underlying asset (e.g., $1/8~ in most stocks), and d = ~in;~ value of a dow~ d movement in the price of the underlying asset ($0.0001 in most futures or cornmodities) Note: u and d are generally established by the exchange and may be stored in a storage m~ m for access or simply input into the system on an as needed basis.

, CA 0226~963 1999-03-17 WO 98/12658 PCTrUS97/16560 Further, as one of ordinary skill in the art would readily ap~l~,,idt~, other related expiring options algorithms m~y be used to transact an expirationless option. Upon receiving a number related to the user's selected algorithrn from the keyboard 230 or the clicking the al,ploplia~e number on the video display with the mouse 240, the present invention 5 proceeds to step 430. Of course, the present invention could be implem~nt~d to simply provide one expiring option algorithm, such that the expiring option algorithm selection step 420 may be removed entirely.

At step 430, the video display 220 plo~ the user to input whether or not it 10 wishes to include extinction bands in the expirationless option tr~n~ction. If the user selects no, then the present invention proceeds to step 500, otherwise it proceeds to step 700.

If the user decides not to include extinction bands in the tran~ction, then, referring 15 to FIG.5, the present invention proceeds to the CALC Module at step 500. The CALC
Module is used to calculate the expirationless option pr~ lll ignoring extinction bands.
Of course, if used exclusively in markets or on exr~n~es without extinction bands, step 430 may be removed entirely.

The present invention then proceeds to the DATA ENTRY Module at step 600.
The DATA_ENTRY Module, as shown in FIG. 6, is used to prompt the user to input data and to accept the data input by the user.

At step 601, the video display 220 plull~ the user to input the current price for the particular asset. The user may obtain the current price for the particular asset from a variety of sources, such as the data source 130. At step 602, the present invention then verifies whether the current price of the asset has been received. If not, then the present invention returns to step 601, otherwise the present invention stores the current price of the asset received under the ASSET PRICE variable in the storage me~ m 250 and proceeds to step 603.

In another embo~lim~nt~ steps 601 and 602 may be replaced by a step which CA 0226~963 1999-03-17 WO 98/126~8 PcTtuss7/l6560 ",;~ir~lly accç~es the current price for the particular asset from the data source 130.
In yet another embo~1im~nt steps 601 and 602 may be replaced by a step which a~ ir~lly accçsses the current price for the particular asset from the storage mr~ m 350 of the server 110 which may be updated ~lltnm~tir~lly by the data source 130 or 5 m~ml~lly by an ~ lur of the network.

At step 603, the video display 220 plO~ the user to input the current risk-free interest rate. The user may obtain the current risk-free interest rate from a variety of sources, such as the data source 130. At step 604, the present invention then verifies 10 whether the current risk-free interest rate has been received. If not, then the present invention returns to step 603, otherwise the present invention stores the current risk-free interest rate received under the T_BILL variable in the storage mPdillm 250 and proceeds to step 605.

In another embo~limPnt, steps 603 and 604 may be replaced by a step which ~ulo---~lir~lly ~rcçsses the current risk-free interest rate from the data source 130. In yet another embo-limPnt steps 603 and 604 may be replaced by a step which autom~ti~lly accesses the current risk-free interest rate from the storage m~-lillm 350 of the server 110 which may be updated autom~tir~lly by the data source 130 or m~nl~lly by an ~mini.~trator of the ncLwo.~.

At step 605, the video display 220 pl(jlllpLS the user to input the standard deviation of the price movement related to the asset known as the "historic price volatility of the asset. " The user may obtain the historic price volatility of the asset from a variety of sources, such as the data source 130. At step 606, the present invention then verifies whether the historic price volatility of the asset has been received. If not, then the present invention returns to step 605, otherwise the present invention stores the historic price volatility of the asset received under the VOLATLTY variable in the storage mP~ m 250 and ploceeds to step 607.
In another embo~3im~nt~ steps 605 and 606 may be replaced by a step which -tom~tir~lly accç~es the historic price volatility of the asset from the data source 130. In CA 0226~963 1999-03-17 yet another embo~im~ont~ steps 605 and 606 may be replaced by a step which aulc~ ir~lly ~ccçsses the historic price volatility of the asset from the storage mP(~ m 350 of the server 110 which may be ur-1~ted autom~tir~lly by the data source 130 or m~n--~lly by an dLol of the network.
s At step 607, the video display 220 plOlllyL~ the user to input the exercise price for the particular asset. At step 608, the present invention then verifies whether the exercise price of the asset has been received. If not, then the present invention returns to step 607, otherwise the present invention stores the exercise price of the asset received under the X PRICE variable in the storage m~ -m 250 and proceeds to step 609.

At step 609, the video display 220 plo-lll LS the user to input the option type (either a call option or a put option). At step 610, the present invention then verifies whether the option type has been received. If not, then the present invention returns to step 609, 15 otherwise the present invention stores the option type under the OPT_TYPE variable in the storage I ll~ U 250 and proceeds to step 611.

At step 611, the video display 220 plolllpls the user to input the margin requirement (margin amount or margin pclcellL~ge) related to the particular asset. The user may obtain 20 the margin re4uirel"c,ll from a variety of sources, such as the data source 130. At step 612, the present invention then verifies whether the margin re4uiIe~cnl for the asset has been received. If not, then the present invention returns to step 611, otherwise the present invention stores the margin le~luilc,llcllL for the asset received under the MARGIN variable in the storage mr~ m 250 and proceeds to step 699, which returns the present invention to 25 step 510 of the CALC Module at FIG. 5.

In another embo~impnt~ steps 611 and 612 may be replaced by a step which ~ tom~ic~lly arcesses the margin re4uirc~ nL from the data source 130. In yet another emboAimrnt, steps 611 and 612 may be replaced by a step which ~ o...~lir~lly arres~es the margin requirement from the storage m~Aillm 350 of the server 110 which may be updated o...~ lly by the data source 130 or m~ml~lly by an ~mini~trator of the network.

CA 0226~963 1999-03-17 At step 510, the present invention sets the ttllll)Olaly option prtllliunl equal to the value of the margin reyui~e,~ (MARGIN) and stores the option ~ lliUII~ under theTEMP_OPT PREM variable in the storage mP(~ m 250. The present invention then proceeds to step 520, where a t~ pOl~y exercise price is set equal to the current price of the asset (ASSET_PRICE) and the temporary exercise price is stored under the TX_PRICE
variable in the storage ~ - 250. The present invention then proceeds to step 530.

At step 530, the present invention del~lll cs the implied tirne for the expirationless option using the option pricing algorithrn selected by step 420, where each option pricing 10 algorithm will provide ~y~lu~illldlely the same irnplied time value. The irnplied time is then stored under the IMPLD T variable in the storage m~ m 250. The present invention then proceeds to step 540.

At step 540, the present invention then determines the actual option pl~lllium for the 15 expirationless option by again using the option pricing algorithm selected at step 420, the X_PRICE selected at step 607, and the implied tirne value (IMPL T). The present invention then proceeds to step 440 of the Main Module at FIG 4.

Referring back to step 430, if the user selects to include extinction bands in the 20 expirationless option tr~n~rtion, then the present invention proceeds to the CALC_E
module at step 700. Referring to FIG 7, the CALC_E Module at step 700 calculates the expirationless option plcll~iuln taking into account extinction bands.

The present invention then proceeds to the DATA ENTRY Module at step 600.
25 Again, the DATA_ENTRY Module, as shown in FIG. 6, is used to prompt the user to input data and to accept the data input by the user.

At step 601, the video display 220 prolll~ the user to input the current price for the particular asset. The user may obtain the current price for the particular asset from a 30 variety of sources, such as the data source 130. At step 602, the present invention then verifies whether the current price of the asset has been received. If not, then the present invention returns to step 601, otherwise the present invention stores the current price of the CA 0226~963 1999-03-17 WO 98tl2658 PCT/US97/16560 asset received under the ASSET_PRICE variable in the storage ",P~ -- 250 and proceeds to step 603.

- In another embo~iim~nt steps 601 and 602 may be replaced by a step which 5 a~,ln~ lly ~ccesses the current price from the data source 130. In yet anotherembo~limPnt steps 601 and 602 may be replaced by a step which ~lltom~tic~lly ar-c~s~es the current price from the storage m~lium 350 of the server 110 which may be updated~uLo...~ir~lly by the data source 130 or m~ml~lly by an a~lmini~trator of the network.

At step 603, the video display 220 I~ro~ L~ the user to input the current risk-free interest rate. The user may obtain the current risk-free interest rate from a variety of sources, such as the data source 130. At step 604, the present invention then verifies whether the current risk-free interest rate has been received. If not, then the present invention returns to step 603, otherwise the present invention stores the current risk-free interest rate received under the T BILL variable in the storage mP~ m 250 and proceeds to step 605.

In another embo~imPnt, steps 603 and 604 may be replaced by a step which ""~ lly ~cce~ses the current risk-free interest rate from the data source 130. In yet another embo~1im~t, steps 603 and 604 may be replaced by a step which autom~tiç~lly accessçs the current risk-free interest rate from the storage mPt~illrn 350 of the server 110 which may be updated aulo--~lic~lly by the data source 130 or m~ml~lly by an a~mini~trator of the n~lwolk.

At step 605, the video display 220 pro~ the user to input the ~ da,.l deviation of the price movement related to the asset known as the "historic price volatility of the asset." The user may obtain the historic price volatility of the asset from a variety of sources, such as the data source 130. At step 606, the present invention then verifies whether the historic price volat}lity of the asset has been received. If not, then the present i"~enlioll returns to step 605, otherwise the present invention stores the historic price volatility of the asset received under the VOLATLTY variable in the storage ~le(li~ 250 and proceeds to step 607.

,.. , ... , , . ~ ...

CA 0226~963 1999-03-17 Wo 98/126S8 PCT/US97/16560 In another embo~im~nt, steps 605 and 606 may be replaced by a step which ic~lly ~ccesses the historic price volatility of the asset from the data source 130. In yet another embo-limPnt, steps 605 and 606 may be replaced by a step which ~u~o-,.~ir~lly 5 ~cc~s.ses the historic price volatility of the asset from the storage 1llk~ l'll 350 of the server 110 which may be updated ~ 01ll~l ir~lly by the data source 130 or m~m~lly by anor of the n~ ~WOl~.

At step 607, the video display 220 p~O~ the user to input the exercise price for 10 the particular asset. At step 608, the present invention then verifies whether the exercise price of the asset has been received. If not, then the present invention returns to step 607, otherwise the present invention stores the exercise price of the asset received under the X_PRICE variable in the storage mP~ m 250 and proceeds to step 609.

At step 609, the video display 220 pro---~ts the user to input the option type (either a call option or a put option). At step 610, the present invention then verifies whether the option type has been received. If not, then the present invention returns to step 609, otherwise the present invention stores the option type under the OPT_TYPE variable in the storage mP I jum 250 and proceeds to step 611.
At step 611, the video display 220 pro.~.yt~ the user to input the margin requirement (margin amount or margin p. lcenlage) related to the particular asset. The user may obtain the margin re4uile~--ell~ from a variety of sources, such as the data source 130.

At step 612, the present invention then verifies whether the margin re4u~renlcnt for the asset has been received. If not, then the present invention returns to step 611, otherwise the present invention stores the margin re~uh~ L for the asset received under the MARGIN variable in the storage ~ i"-" 250 and proceeds to step 699, which returns the present invention to step 510 of the CALC E Module at FIG. 7.
In another embo~1im~nt~ steps 611 and 612 may be replaced by a step which autom~tir~lly ~rcesses the margin requirement from the data source 130. In yet another CA 0226~963 1999-03-17 emborlim~nt, steps 611 and 612 may be replaced by a step which ~ o.,.~lic~lly accP~ses the margin re~luile.llcnl from the storage ~,r~ 350 of the server 110 which may be updated ~."o"".lic~lly by the data source 130 or m~nl-~lly by an ~rl...i-~ tor of the network.

At step 710, the video display 220 proll,~ls the user to input whether or not itwishes to d~lll~ille the extinction band in perc~ AgPs or in dollars. If the user selects perc~ g~s, then the present invention proceeds to step 720, otherwise it proceeds to step 750.

At step 720, the video display 220 IJlolllpLs the user to input the perce.l~age price movement to be used to determine the e~tinrtion band and the pelce~ ge is stored under the PERCENT variable in the storage Ill~ 250. The present invention then proceeds to step 725, where it determines whether the expirationless option type (OPTION_TYPE) is a "call" or a "put". If the expirationless option is a "call," then the present invention ploceeds to step 730, otherwise it proceeds to step 735.

At step 730, the current asset price (ASSET PRICE) for the "call" option is set to the current asset price (ASSET_PRICE) multiplied by the value composed of the pe.cell~ge price movement (PERCENT) plus one. On the other hand, at step 735, the current asset 20 price (ASSET PRICE) for the "put" option is set to the current asset price (ASSET_PRICE) multiplied by the value composed of the percentage price movement (PERCENT) minus one.
The present invention then proceeds from step 730 or step 735 to step 775. The present invention, at step 775, a~cesses and receives the e~tinrtinn date for the particular~5 asset (EXT DATE) which has been set by the exc~l~n~e and stored by the system cr from the storage ~ rli~"~ 250 or 350. Of course, the extinction date could also be m~ml~lly input by the user of the present invention, who could m~n-~lly input the çxtinrtion date set by the exchange each time the system is used. The present invention then proceeds to step 780.
At step 780, the present invention then dele..nines the option pl~.niul.l for the expirationless option t~king into account the e~tinrtinn band by again using the option , ~

CA 0226~963 1999-03-17 Wo 98/12658 Pcr/uss7ll6~6o pricing algorithm selected at step 420 and setting the value of time until expiration in the algorithm to EXT_DATE. The present invention then proceeds to step 799.

Referring back to step 710, if the user selects to use dollars to determine the extin~tion band, then the invention proceeds to step 750. At step 750, the video display 220 pro~ the user to input the In;~ dollar amount price movement to be used to determin~ the extinrtiQn band, and the dollar amount price movement is stored under the TICK variable in the storage m~ m 250. At step 755, the present invention then sets the BAND variable to dollars.
The present invention then proceeds to step 760, where it deterrnines whether the expirationless option type (OPTION_TYPE) is a "call" or a "put" option. If the expirationless option is a "call," then the present invention proceeds to step 765, otherwise it proceeds to step 770.
At step 765, the current asset price (ASSET_PRICE) for the "call" option is set to the current asset price (ASSET_PRICE) plus the BAND divided by the dollar amount price movement (TICK). On the other hand, at step 770, the current asset price (ASSET_PRICE) for the "put" option is set to the current price (ASSET_PRICE) minus the 20 BAND divided by the dollar arnount price movement (TICK).

The present invention then proceeds from step 765 or step 770 to step 775. The present invention, at step 775, ;~rcesses and receives the extinction date for the particular asset (EXT DATE) which has been set by the exchange and stored by the system 25 a~ or from the storage m~ m 250 or 350. Of course, the extinction date could also be m~m-~lly input by the user of the present invention, who could m~m~lly input the extinction date set by the exch~nge each time the system is used. The present invention then proceeds to step 780.

At step 780, the present invention then determines the option ~)rC,Iliulll for the expirationless option taking into account the extinction band by again using the option pricing algorithm selecte(~ at step 420 and setting the value of time until expiration in the CA 0226~963 1999-03-17 WO 98/12658 PCT/USg7/16560 algorithm to EXT_DATE. The present invention then proceeds to step 799.

At step 799, the present invention proceeds to step 440 of the Main Module at FIG.
4, where it stores the exl.ildLiollless option ~,lellliulll under the variable OPT PREM at the storage medium 250. At step 450, the present invention then completes the current expirationless option tr~n~rtion by issuing a buy or sell hard copy (ticket) to the user which inr~ s the option plellliulll and other ~ Lillcllt infollllaLion related to the tr~n~etion.

The present invention then proceeds to step 470, where the video display 220 proll,pl~ the user to del~llllhle whether it wishes to transact another expirationless option.
If yes, then the present invention proceeds to step 420, where the user is again l,lolll~,~ed by the video disp}ay 220 to select an option pricing algorithm. If no, then the present invention proceeds to step 499, where it ends the expirationless option tr~n~acti-)ns for the 15 current user.

Of note, the pref~r~ed embodiment of the present invention assumes that, even though they may not be in actuality, the interest rates and dividend yield associated with each particular asset (e.g., a stock, bond, etc.) are zero. The reason for the assumption is 20 that algorithms used in conn~ction with pricing the underlying asset already factor the interest rate and dividend yield into the asset price. These algoriLIl-lls may be either m~th~rn~tir~l, inductive or both. Accordingly, the present invention for tr~n~ ting an expirationl~cs options using the same algo~ ls used for expiring options factors the interest rate and dividend yield into the option pl~:llliUlll, but at a value of zero to ensure 25 both the call and the put option at S=X have a price equal to the margin re-luir~ ul.

The following examples illustrate the time/cost relationship between e~hing options, prel"iullls, expirationless options and margin requilelllents. Both examples assume a margin requirement of 25 %, a current asset price of 50, a historic price volatility of 35 %, 30 and a current risk-free interest rate of 6% . Thus, using Black-Sholes algorithm, an implied time of 1210.09 days is derived.

Wo 98/12658 PCT/US97/16560 The first example ~C.cum~s a call option with an exercise price of $60 is requested by the investor.

Time to Expiring Expirationless Margin Expiration Option Pl~.. iul~l Option P~ liulll Re~ui,~."ent Six Months 2.15 9.29 12.5 One Year 4.59 9 29 12.5 Fi~ht.oen Months 6.65 9.29 12.5 Two Years 8.56 9.29 12.5 Three Years 11.87 9.29 12.5 Five Years 16.63 9.29 12.5 Ten Years 27.04 9.29 12.5 s The second example ~csllmPs a put option with an exercise price of $40 is requested by the investor.

Time to Expiring Expirationless Margin ExpirationOption Pr~.-liulllOption Pl~llliulll Re~luire.,.en~

Six Months 0.85 6.91 12.5 One Year 1.78 6.91 12.5 Fi~htt~en Months 2.45 6.91 12.5 Two Years 2.96 6.91 12.5 Three Years 3.66 6.91 12.5 Five Years 4.29 6.91 12.5 Ten Years 4.45 6.91 12.5 What has been described above is a plef~.led embo~im~nt of the present invention.

.. ..

CA 0226~963 1999-03-17 WO 98/12658 pcTluss7ll656o It is of course not possible to describe every conceivable colllbinalion of components or mrtho~lologies for purposes of describing the present invention, but one of ordinary skill in the art will recogr~ize that many further co~ aliolls and p~ ulalions of the present invention are possible. For example, expirationless options may be used in constructing 5 any combination or p... ",~ on of expiring options cul~clllly used. These include Asian, or average price/rate and strike options; Barrier, which are knock-out or knock-in with and without rebate; Binary, inrl~ ing binary barrier, all-or-none and gap; Chooser, which is an option to choose a put or call in the future; Col,lpoulld, an option on an option;
Crack/Spread, or an option on the ~i~t~n~e between prices of two assets; Currency 10 Tr~n.cl~ted, or foreign exch~nge options translated into another currency; Jump, pricing using a jump-diffusion process; Lookback, or option based on minimllm or maximum price within a certain period; Rainbow, or option on the ~ - or maximum of two assets;
options on U.S. or foreign "stripped" go~/cllullcnl securities divided into two or more h~ l UIIIClll~ of principal and interest or price and dividend, likewise options on stripped 15 corporate, agency, and municipal securities, notes, bills and Certificates of Deposit; options on Callables; or securities callable at prcllliulll or discount; and options on Odd-First, -Last, -Middle, or securities with varying coupon/dividend periods. Though certainly not limited to only these options, this list provides a clear example of the breadth of application of Expirationless American Options. Also, even though the present invention has been 20 described subst~nti~lly in terms of utili7.ing the margin requirement of a margin position in the securities market, equivalents to the margin re4uirelllclll in other markets (e.g., earnest money in the real estate market) may be utili_ed. Further, even though the ~lcfellcd embodiment of the present invention is described ~c~llllling that the margin re~luilclllelll on the underlying security is equal for both the long and short positions, this need not be the 2~ case. Specifically, even in cases where the margin position le~lui ull~ are dir~ , it should be obvious to one of the ordinary skill in the art that the present invention can be used to dctellnille the expirationless option prelluullls comprising each respective position by using the long position margin requirement for pulch~ing expirationless call options and selling expirationless put options, while using the short position margin fe~luilallent for 30 purchasing expirationless put options and selling expirationless call options. All such possible mo~ifiratif)ns are to be included within the scope of the claimed invention, as defined by the appended claims below.

Claims (17)

1. A data processing apparatus for use in transacting an expirationless option on a particular asset, said data processing apparatus comprising:

(A) means for receiving data representative of a particular asset, an option type, an exercise price for the particular asset, the current price of the particular asset, the historic price volatility of the particular asset and the margin requirement for the particular asset;

(B) a storage medium adapted to store the data received by said receiving means and an expiring option premium algorithm;

(C) means, responsive to the data received by said receiving means, for generating data representative of an option premium for the expirationless option on the asset using the expiring option premium algorithm; and (D) means for outputting the option premium data for use in transacting the expirationless option.

2. The data processing apparatus of claim 1, further comprising a means for inputting at least part of the data received by the receiving means.

3. The data processing apparatus of claim 2, said inputting means selected from the group consisting of: a keyboard and a mouse.

4. The data processing apparatus of claim 1, further comprising one or more data source for sending at least part of the data to the receiving means.

5. The data processing apparatus of claim 1, said outputting means selected from the group consisting of: a video display and a printer.

6. A process of operating a computer system for transacting an expirationless option, said process comprising the steps of :
(A) prompting a user to input data representative of a particular asset;
(B) receiving a first signal from the user, wherein said first signal is representative of data for the particular asset;

(C) prompting the user to input data representative of a option type;
(D) receiving a second signal from the user, wherein said second signal is for the particular asset;
(E) prompting the user to input data representative of an exercise price for the particular asset;
(F) receiving a third signal from the user, wherein said third signal is representative of data for the exercise price for the particular asset;
(G) receiving a fourth signal from a data source or the user, wherein said fourth signal is representative of data related to the current price for the particular asset, the current risk-free interest rate, the historic price volatility for the particular asset and the margin requirement for the particular asset;
(H) in response to said first, second, third and fourth signals and using an expiring option premium algorithm:
(i) setting each variable of the option premium algorithm to its associated data value received in steps (B) and (G), (ii) setting the exercise price variable equal to the current price for the particular asset data from said fourth signal, (iii) setting the option premium variable equal to the margin requirement for the particular asset data, and (iv) generating data representative of an implied time; and (I) using the expiring option premium algorithm:

(i) setting the exercise price variable equal to the exercise price data of said third signal, and (ii) generating data representative of an option premium for use in transacting the expirationless option.

7. The process of claim 6, wherein said second signal is representative of data for the option type selected from the group consisting of: a put or a call.

8. The process of claim 6, further comprising the step of:

(J) recording the option premium data on a storage medium.

9. The process of claim 6, further comprising the step of:

(J) outputting the option premium data.

10. A process of operating a computer system for transacting an expirationless option, said process comprising the steps of:

(A) prompting a user to input data representative of a particular asset;

(B) receiving a first signal from the user, wherein said first signal is representative of data for the particular asset;

(C) prompting the user to input data representative of an option type;

(D) receiving a second signal from the user, wherein said second signal is representative of data for the option type;

(E) prompting the user to input data representative of an exercise price for the particular asset;

(F) receiving a third signal from the user, wherein said third signal is representative of data for the exercise price for the particular asset;

(G) receiving a fourth signal from a data source of the user, wherein said fourth signal is representative of data related to the current price for the particular asset, the current risk-free interest rate, the historic price volatility for the particular asset and the extinction date for the particular asset; and (H) in response to said first, second, third and fourth signals and using an expiring option premium algorithm:

(i) setting each variable of the option premium algorithm to its associated data value received in steps (B), (F) and (G), (ii) setting time variable equal to the extinction date for particular asset data from said fourth signal, and (iii) generating data representative of an option premium for use in transacting in expirationless premium.

11. The process of claim 10, wherein said second signal is representative of data for the option type selected from the group consisting of: a put or a call.

12. The process of claim 10, further comprising the step of:

(I) recording the option premium data on a storage medium.

13. The process of claim 10, further comprising the step of:

(I) outputting the option premium data.

14. The process of claim 11, wherein said fourth signal is further representative of data related to a percentage for an extinction band, and wherein step (H), prior to substep (iii), further comprises the step of setting the asset price variable equal to the percentage data plus one times the current price for the particular asset data if the option type is a call or setting the asset price variable equal to one minus the percentage data times the current price for the particular asset data if the option type is a put.

15. The process of claim 11, wherein said fourth signal is further representative of data related to a dollar amount tick for an extinction band and a dollar amount for the extinction band, and wherein step (H), prior to substep (iii), further comprises the step of setting the asset price variable equal to the extinction band data divided by the tick data plus the current price for the particular asset data if the option type is a call or setting the asset price variable equal to the current price for the particular asset data minus the extinction band data divided by the tick data if the option type is a put.

16. An expirationless option financial instrument produced by the process of:

(A) prompting a user to input data representative of a particular asset;

(B) receiving a first signal from the user, wherein said first signal is representative of data for the particular asset;

(C) prompting the user to input data representative of an option type;

(D) receiving a second signal from the user, wherein said second signal is representative of data for the option type;

(E) prompting the user to input data representative of an exercise price for the particular asset;
(F) receiving a third signal from the user, wherein said third signal is representative of data for the exercise price for the particular asset;

(G) receiving a fourth signal from a data source or the user, wherein said fourth signal is representative of data related to the current price for the particular asset, the current risk-free interest rate, the historic price volatility for the particular asset and the margin requirement for the particular asset;

(H) in response to said first, second, third and fourth signals and using an expiring option premium algorithm:

(i) setting each variable of the option premium algorithm to its associated data value received in steps (B) and (G), (ii) setting the exercise price variable equal to the current price for the particular asset data from said fourth signal, (iii) setting the option premium variable equal to the margin requirement for the particular asset data, and (iv) generating data representative of an implied time; and (I) using the expiring option premium algorithm:

(i) setting the exercise price variable equal to the exercise price data of said third signal, and (ii) generating data representative of an option premium for use in producing the expirationless option financial instrument.

17. An expirationless option financial instrument produced by the process of:

(A) promoting a user to input data representative of a particular asset;

(B) receiving a first signal from the user, wherein said first signal is representative of data for the particular asset;

(C) promoting the user to input data representative of an option type;

(D) receiving a second signal from the user, wherein said second signal is representative of data for the option type;

(E) promoting the user to input data representative of an exercise price for the particular asset;

(F) receiving a third signal from the user, wherein said third signal is representative of data for the exercise price for the particular asset;

(G) receiving a fourth signal from a data source of the user, wherein said fourth signal is representative of data related to the current price for the particular asset, the current risk-free interest rate, the historic price volatility for the particular asset and the extinction date for the particular asset; and (H) in response to said first, second, third and fourth signals and using an expiring option premium algorithm:

(i) setting each variable of the option premium algorithm to its associated data value received in steps (B), (F) and (G), (ii) setting time variable equal to the extinction date for particular asset data from said fourth signal, and (iii) generating data representative of an option premium for use in producing the expirationless option financial instrument.