REDUCING THE MARKET IMPACT OF LARGE STOCK TRADES - AND OTHER APPLICATIONS OF EQUITY FLEX OPTIONS

Innovation has become an everyday feature of financial markets, but th e significance of a small change in market structure is often hard to evaluate. On apparently minor innovation, Equity-FLEX options, first t raded on the American Stock Exchange in late 1996. Equity-FLEX rules p ermit customized strike prices, expiration dates, and exercise styles (European or American) on stock options. Although initial Equity-FLEX position limits were much larger than position limits on standardized options, the AMEX persuaded the SEC to eliminate all position limits o n these contracts in the third quarter of 1997. The authors describe E quity-FLEX opportunities for low-impact block trading, equity position risk management, and other tactical option applications. Several of t hese applications could be important for any large equity portfolio.