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 the significance of a small change in market structure is often hard to evaluate. On apparently minor innovation, Equity-FLEX options, first traded on the American Stock Exchange in late 1996. Equity-FLEX rules permit 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 on these contracts in the third quarter of 1997. The authors describe Equity-FLEX opportunities for low-impact block trading, equity position risk management, and other tactical option applications. Several of these applications could be important for any large equity portfolio.