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Tailor made combinations

Options Combination Brochure
Equity Combination Brochure

Tailor-Made Combinations (TMCs) provide the flexibility to execute trading strategies with particular single series components. An incoming Tailor Made Combination Order may be executed against other opposing TMC Orders, as well as outright Orders in the component instruments (legs) that together are able to satisfy the TMC Order at the same or at a better price than the net price.

TMCs such as covered calls, spreads, and rolling from one expiry to the next are traded on ASX Trade.

The following combinations are available for trading as TMCs:

  • Derivative Only Combinations – comprising of Exchange Traded Options and Futures contracts
  • Cash Only Combinations – comprising of Equity, Interest Rate and Warrant instruments
  • Derivative/Cash Combinations – Exchange Traded Options and Cash Market Products

Each TMC represents a specific combination strategy made up of multiple single component instruments or “legs”. For each leg, a side (whether to buy or sell) and ratio (how much to buy or sell of the leg per unit of the combination) are defined as the result of buying and selling the combination.

To determine the quantity of each component leg trade, the system applies an implied multiplier or minimum lot size in conjunction with the ratio. This implied multiplier/minimum lot size is equal to 1, except for an Equity leg of a Derivative/Cash TMC where it is set equal to the Price Quotation Factor or Contract Size of the component derivative leg(s) for which the standard size is 100.

In order to increase the possibility of trading your total combination ASX Trade generates Derived Orders.   Derived Orders may be generated for a component leg of a TMC whenever the best price and quantity available on the opposite side of the remaining legs is sufficient to satisfy the TMC Order.

Important points relating to Derived Orders:

  • When a Derived Order is matched, the resulting traded price is determined by the passive order, (order standing in the market), in the same way as two normal Limit Orders. For example, if an incoming Derived Order (aggressive) matches against a normal Limit Order (passive), then the price of the passive order determines the traded price. Conversely, if the Derived Order is unable to be matched when generated and queued in the order book as a passive order then the Derived Order will determine the traded price. A Derived Order may be passive if the best bid/offer orders in the Central order book are not in multiples of 100/standard contract size (which can occur when transacting a Derivative/Equity TMC).
  • In order to match a passive Derived Order for the Equity leg of a Derivative/Equity TMC, the opposing aggressive Equity order (new or as a result of an amendment) must have sufficient volume to satisfy the ratio relationship and multiplier for the component leg (i.e. multiple of the ratio for the Equity leg and the contract size for the option leg – standard 100).
  • In order to match an aggressive Derived Order for the Equity leg of a Derivative/Equity TMC, the derived order may trade with opposing orders in multiples other than 100 (or the applicable contract size of the Derivative leg) if aggregated volume of the orders at the same price level on the opposing side equate to multiples of 100 x the ratio of the Equity leg.
  • A Derived Order will be aligned to be just within the upper or lower limit of the Anomalous Order Threshold (AOT). This may result in the Equity leg being executed up to 10%, or at a specific value away, from the current market price.
  • All TMC trades (including trades executed with a Derived Order) are indicated using a particular Deal Source “deal_source_c” over the ASX Trade API. For more information on deal sources please refer to the ASX Trade Open Interface Manual via ASX Online.

Example of a Derivative to Derivative TMC

Assume you want to roll an April expiry option into a series expiring in May, for a net credit of 20 cents.

Current market prices are:

&nspb; Bid  Offer
April expiry 28 32
May expiry 49 55

Entering the combination as a TMC would result in the system generating two Derived Orders to maximise the ability for the TMC to trade.

 

  1. A Derived Order is generated in the May expiry on the offer at 52 cents. If the Derived Order at 52 cents is traded, then the system instantaneously transacts the purchase of the April options at 32 cents. The result is that you have traded the combination for the net credit of 20 cents.
  2. A Derived Order will also be generated in the April expiry on the bid at 29 cents. If the Derived Order at 29 cents is traded, then the system instantaneously transacts the May expiry leg at 49 cents. The result is that you have traded the combination for the net credit of 20 cents.

As the market in either leg moves, the Derived Orders will be adjusted to maintain the required 20 cents credit.

Example of a Derivative to Equity TMC

Assume you want to buy an option and sell the underlying equity for a net credit of 35 cents.

Current market prices are:

  Bid  Offer
ETO 70 76
Stock 108 115

 

Entering the combination as a TMC would result in the system generating two Derived Orders to maximise the ability for the TMC to trade.

  1. A Derived Order is generated in the equity on the offer at 111 cents. If the Derived Order at 111 cents is traded, then the system instantaneously transacts the purchase of the options at 76 cents. The result is that you have traded the combination for the net credit of 35 cents.
  2. A Derived Order will also be generated in the option on the bid at 73 cents. If the Derived Order at 73 cents is traded, then the system instantaneously transacts with the equity leg at 108 cents.  The result is that you have traded the combination for the net credit of 35 cents.

As the market in either leg moves, the Derived Orders will be adjusted to maintain the required 35 cents credit.

Example of an Equity to Equity TMC

Assume you want to sell an equity (ABC) and buy another equity (XYZ) against it for a net debit of 117 cents.

Current market prices are:

Bid Offer
ABC 510 517
 XYZ 625 630

Entering the combination as a TMC would result in the system generating two Derived Orders to maximise the ability for the TMC to trade.

  1. A Derived Order is generated in XYZ on the bid at 627 cents. If the Derived Order at 627 cents is traded, then the system instantaneously transacts the sale of ABC at 510 cents. The result is that you have traded the combination for the net debit of 117 cents.
  2. A Derived Order will also be generated in ABC on the offer at 513 cents. If the Derived Order at 513 cents is traded, then the system instantaneously transacts the purchase of XYZ at 630 cents. The result is that you have traded the combination for the net debit of 117 cents.

As the market in either leg moves, the Derived Orders will be adjusted to maintain the required 117 cents debit.