London Stock Exchange
Derivatives Market
Strategies in SOLA
This document is an overview only. Interested parties should consult the Trading Services Description for additional
information regarding trading services and risk controls. London Stock Exchange plc has made reasonable efforts
to ensure that this overview is correct at the time of writing, but does not guarantee its accuracy, timeliness,
completeness, performance or fitness for a particular purpose, and shall not be liable for any errors, omissions, or
inaccurate information in this overview, or any decisions made in reliance on it.
© March 2015
Version 1.0 [30 March 2015]
London Stock Exchange Group plc, 10 Paternoster Square, London EC4M 7LS.
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LSEDM - Strategies
30 March 2015
Strategies in SOLA
This document summarises the strategy functionality on the London Stock Exchange Derivatives Market (LSEDM) trading
platform (SOLA) including a description of the functionality offered, automatically generated strategy instruments on the platform
and how to set-up pre-configured strategies on a front-end solution, using the example of the LSEG front-end BTS.
1.0 Introduction
London Stock Exchange Derivatives Market (LSEDM) trading platform (SOLA) facilitates trading in derivatives
strategies, in line with the trading needs of LSEDM Members. The functionality is highly customisable, allowing
market participants to create their own strategy instruments with up to 4 legs and list them for trading by the rest
of the market. The trading platform also generates set of automatic strategy instruments, and offers front-end
developers the ability to build a set of pre-configured strategies for ease of execution. LSEG’s front-end
solution, BTS, allows users to use its Strategy Wizard to execute through more than 20 pre-configured strategy
combinations.
2.0 Description of functionality
Strategies can have a maximum of four legs. Each leg of the strategy must: (a) contain instruments with the
same contract size, and (b) have legs that appear in natural number ratios, i.e. as multiples of the smallest leg
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size in increasing order . Market participants will need to enter the price of the entire strategy, i.e. the sum of
the price of each leg. Once a strategy instrument is created by a market participant, it will be listed and available
to trade by the rest of the market.
2.1 Types of execution:
Strategy instruments can be executed on all LSEDM futures and options through the Order book. Strategies on
the Order book can be executed by both “Strategy v.s. Strategy” and “Strategy v.s Legs” functionality, to
maximise the potential for execution. When using the “Strategy v.s. Legs” (or “implied trade”) functionality, the
order will execute only when each leg of the strategy is filled (by orders in the Order book with standard price-time
priority) with a corresponding bid or ask order on the other side, ensuring simultaneity of execution.
SOLA automatically validates the price and quantity of each leg of the strategy before allowing for execution, to
ensure that market participants obtain the best results for their trades. Strategies interact with the LSEDM’s circuit
breakers, bulk quoting protections, and contribute to price and quantity updates to the Market Data Feed (HSVF).
2.2 Automatically generated strategies:
LSEDM is currently configured to automatically list Calendar Spreads or “Roll” strategy instruments for Order
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book traded Index Futures . Typically, LSEDM will automatically generate a roll instrument between the expiring
series and the following expiry month which are available for trading on the Order book.
2.3 Bundled Orders:
As an alternative to strategies, market participants on LSEDM can use Bundled Orders to execute Block trades in
up to four legs. Each leg of the Bundled Order can contain futures and options based on the same or different
underlyings, and with the same or different counterparty. Each leg of the Bundled Order can be priced separately.
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If market participants wish to enter a strategy with derivatives based on different underlyings/ contract sizes, they may use the Bundled Order
functionality on LSEDM to be more relevant. Please refer to the LSEDM Trading Services Description for further details
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Depending on demand, LSEDM may consider listing other strategy instruments for automatic generation. Please contact
[email protected] to discuss with a client representative.
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LSEDM - Strategies
30 March 2015
This feature provides the ability for traders to create a trade involving both options and the underlying (future), and
may be useful for “volatility trades”. For further information on Bundled Orders, please refer to the LSEDM
Document Library.
3.0 FOR DEVELOPERS: Setting up pre-configured strategies on front end solutions
LSEDM’s SOLA API allows developers to build front end solutions with pre-configured strategies. Developers need
to make use of the FLEXCO creation/ New Strategy Instrument message to send the details of their strategy to
SOLA. For further details, please see the LSEDM Technical Documentation (SAIL Specification and FIX
Specification.)
For example, BTS allows market participants to select one of several pre-configured 2, 3 and 4-legged strategies,
through its Strategy Wizard. Traders will only need to enter the total price and size of the strategy, and relevant
strikes for each leg of the strategy trade. The strategy will then be listed to enable trading on the instrument. BTS
also allows users to build their own customised strategies through FLEXCO creation field.
3.1 Using the Strategy Wizard on BTS:
Market participants can open the “Strategy Wizard” by right clicking any instrument on the order book. The Wizard
then offers the ability to easily choose through drop down boxes the underlying, strategy type and specify the
relevant strikes, size of each leg and price. The Wizard also provides a snapshot of the order book for each
instrument leg, showing the best bid/ask and the associated sizes. Market participants can use the Strategy Wizard
to execute a strategy either as an order or as a block trade (with the relevant price and tick size).
For example, for a SBER Feb 2015 Call Butterfly on the Order book, the Strategy Wizard will appear as above.
Once the details are filled, “Pay” will allow the market participant to pay the specified price for trading one lot of the
created strategy; “Cash” will allow the market participant to get at least the specified price for trading one lot of the
created strategy.
3.2 LSEDM suggested convention for pre-defined strategies:
To assist front end developers in building a set of pre-defined strategies, LSEDM suggests the following convention
(useful for developing front end systems). Please note, this is a simply an illustration of how to build a pre-defined
list. Market participants can choose their own convention, using the FLEXCO message.
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LSEDM - Strategies
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Strategy
Description (Long position)
LSEDM BTS convention
(K = strike, T = maturity)
2 legged strategies
1.
Calendar Spread
(IOB and UK products)
Buy the near month future and sell the far month
future
Buy F (T1)
Sell F (T2), T1 < T2
2.
Calendar Spread
(Oslo products)
Sell the near month future and buy the far month
future
Sell F (T1)
Buy F(T2), T1 < T2
3.
Call Calendar Spread
Buy the near month call and sell the far month call
Buy C (K, T1)
Sell C (K, T2), T1 < T2
4.
Put Calendar Spread
Buy the near month put and sell the far month put
Buy P (K, T1)
Sell P (K, T2), T1 < T2
5.
Diagonal Call Calendar
Spread
Buy the near month call and sell the far month call
at different strike prices
Buy C (K1, T1)
Sell C (K2, T2), T1 < T2
6.
Diagonal Put Calendar
Spread
Buy the near month put and sell the far month put
at different strike prices
Buy P (K1, T1)
Sell P (K2, T2), T1 < T2
7.
Straddle
Buy a call and a put at the same strike (and at the
same expiry date)
Buy C (K, T)
Buy P (K, T)
8.
Collar
Buy a put at the lower strike and sell a call with a
higher strike price (and at the same expiry date)
Buy P (K1, T)
Sell C (K2, T), K1 < K2
9.
Risk Reversal
Sell a put and buy a call at the same strike (and at
the same expiry date)
Sell P (K, T)
Buy C (K, T)
10. Call Spread
Buy call at lower strike price and sell call at higher
strike price (and at the same expiry date)
Buy C (K1, T)
Sell C (K2, T), K1 < K2
11. Put Spread
Buy put at higher strike price and sell put at lower
strike price (and at the same expiry date)
Sell P (K1, T)
Buy P (K2, T), K1 < K2
12. Ratio Call Spread
Buy a call at lower strike price and sell 2 calls at a
higher strike price (and at the same expiry date)
Buy C (K1, T)
Sell 2 x C (K2, T), K1 < K2
13. Ratio Put Spread
Sell a put at lower strike price and Buy 2 puts at a
higher strike price (and at the same expiry date)
Sell 2 x P (K1, T)
Buy P (K2, T), K1 < K2
14. Straddle versus Short
Call
Buy a call and a put at the same strike (and at the
same expiry date), sell a call at higher strike
Buy C (K1, T)
Buy P (K1, T)
Sell C (K2, T), K1 < K2
15. Straddle versus Short
Put
Buy a call and a put at the same strike (and at the
same expiry date), sell a put at a lower strike
Sell P (K1, T)
Buy C (K2, T)
Buy P (K2, T), K1 < K2
16. Call Butterfly
Sell two calls at a middle strike, buy two calls each
at lower and higher strike (all with same expiry
date and with strikes equidistant)
Buy C (K1, T)
Buy C (K3, T)
Sell 2 x C (K2, T), K1 < K2 < K3
17. Put Butterfly
Sell two puts at a middle strike, buy two puts each
at lower and higher strike (all with same expiry
date and with strikes equidistant)
Buy P (K1, T)
Buy P (K3, T)
Sell 2 P (K2, T), K1 < K2 < K3
18. Call Ladder
Buy call, sell call at higher strike and sell call at
equally higher strike (all with same expiry date
and with strikes equidistant)
Buy C (K1, T)
Sell C (K2, T)
Sell C (K3, T), K1 < K2 < K3
19. Put Ladder
Sell put, sell put at higher strike and buy put at
equally higher strike (all with same expiry date
and with strikes equidistant)
Sell P (K1, T)
Sell P (K2, T)
Buy P (K3, T), K1 < K2 < K3
20. Call spread versus
Short Put
Buy Call, sell Call at higher exercise price, sell Put
Sell P (K1, T)
Buy C (K2, T)
3 legged strategies
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LSEDM - Strategies
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Strategy
Description (Long position)
at any (lowest) strike
21. Put spread versus
Short Call
LSEDM BTS convention
(K = strike, T = maturity)
Sell C (K3, T), K1 < K2 < K3
Buy Put and sell Put at lower strike, sell Call at
any (highest) strike
Sell P (K1, T)
Buy P (K2, T)
Sell C (K3, T), K1 < K2 < K3
22. Straddle Calendar
Spread
Selling a near term straddle while buying a longer
term straddle at same strike prices
Sell C (T1, K)
Sell P (T1, K)
Buy C (T2, K)
Buy P (T2, K), T1 < T2
23. Iron Butterfly
Buy a put and a call at a middle strike, sell a put at
a lower strike and a call at a higher strike (all with
same expiry date and with strikes equidistant)
Sell P (T, K1)
Buy P (T, K2)
Buy C (T, K2)
Sell C (T, K3), K1 < K2 < K3
24. Call Condor
Sell two calls at middle equidistant strikes, buy
two calls each at lower and higher strike (all with
same expiry date and with strikes equidistant)
Buy C (T, K1)
Sell C (T, K2)
Sell C (T, K3)
Buy C (T, K4), K1 < K2 < K3 < K4
25. Put Condor
Sell two puts at middle equidistant strikes, buy two
puts each at lower and higher strike (all with same
expiry date and with strikes equidistant)
Buy P( T, K1)
Sell P (T, K2)
Sell P (T, K3)
Buy P (T, K4), K1 < K2 < K3 < K4
26. Box
Buy call and sell put at same strike, buy put and
sell call at higher strike (all with same expiry date)
Buy C (T, K1)
Sell P (T, K1)
Sell C (T, K2)
Buy P (T, K2), K1 < K2
27. Diagonal Straddle
Calendar Spread
Sell near term straddle and buy long term straddle
at different strike prices.
Sell C (T1, K1)
Sell P (T1, K1)
Buy C (T2, K2)
Buy P (T2, K2), T1 < T2
28. Iron Condor
Buy Put 1, Sell Put 2, Sell Call 1 and Buy Call 2 all
in ascending order of strike price, all at the same
maturity
Buy P (K1, T)
Sell P (K2, T)
Sell C (K3, T)
Buy C (K4, T), K1 < K2< K3 < K4
4 legged strategies
4.0 For further information contact:
For technical enquiries:
LSE Derivatives Technical Account Management
T: +44 (0) 20 7797 3939
E: [email protected]
For further information on this document:
LSE Derivatives Market
T: +44 (0) 20 7797 3833
E: [email protected]
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