Flexible exchange traded options (FLEX options) are option contracts without set terms. The customer and broker independently negotiate the terms of the contract, and they have the ability to choose their own structure. These options are not typically offered directly through brokers. They are more likely to be offered through a clearinghouse when a broker would like to execute an option and is running out of choices to do so. The clearinghouse can negotiate on behalf of two parties to structure the FLEX option appropriately.

Types of Options Contracts

There are several different types of options available for purchase. Put options allow the buyer to sell the option to the buyer at a certain strike price in a given period. In a call option, the customer has the right to buy a number of shares at a given strike price during a certain length of time. In both scenarios, the customer has the right but not the obligation to execute the contract. These options are typically designed by a company or brokerage and offered in bulk according to set terms. If a customer finds the terms attractive, he or she can buy the option.

Characteristics of a FLEX Option

A FLEX option is one of a kind. The buyer contacts a broker or clearinghouse to ask for an option with a given set of terms. Or a seller or broker can contact the clearinghouse offering a specific contract. The clearinghouse aims to bring the two parties together, but the two parties will often have different terms. The role of the broker or clearinghouse is to make sure the option is purchased by negotiating the terms so both parties will agree to sign the contract. Even if the option is not executed, the option has still been sold.

Benefits of a FLEX Option

FLEX options are exchange traded, which means they are available in the same method as any other exchange traded security. A routine customer can buy or sell a FLEX option openly on the market. Further, as with all options, the customer does not have the obligation to execute the option unless the desired strike price is hit. Even then, it is up to the customer whether to execute. With a FLEX option, a sophisticated investor has more flexibility to seek the terms of contract he or she believes are most likely to be executed in the future.

Risks of a FLEX Option

FLEX options are unique, which often means they are not highly liquid. Unless another customer desires the precise terms you set in your contract, you will not be likely to find a buyer on the open market immediately. Further, FLEX options require negotiation, which means they take a longer time even to purchase. Common investors may find it more efficient to simply purchase standard options contracts rather than FLEX options.

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