Agency broker Bloomberg Tradebook has launched a suite of US options algorithms, called PegTo, which allow users to trade based on their view of whether certain option price measurements – known as greeks – are cheap or expensive.
Greeks are so called because they are named after letters of the Greek alphabet. Delta, for example, is the ratio between the change in option price to the change in price of the underlying asset. Vega represents the amount an option price changes in relation to a 1% shift in volatility.
PegTo Volatility (vega) allows a trader to select a price of a volatility to buy or sell. Tradebook takes the trader’s designated volatility price and real-time underlying stock price and calculates an appropriate limit price for the options order. The algorithm routes and adjusts the options order limit to float with a specific volatility for an underlying security. As the price of the underlying security fluctuates, Tradebook cancels and replaces the working limit order to match the calculated volatility.
The new PegTo Delta algorithm routes and adjusts an order’s limit to float with a specified delta to the underlying security. As the price of the underlying fluctuates, Tradebook cancels and replaces the working limit order to float with the specified delta.
The new PegTo Bid/Ask algorithm allows orders to float with the national best bid and offer (NBBO) to capture the spread. The PegTo Bid (buy) algorithm enables a trade to float with the best bid to seek to capture the spread. The PegTo ask (sell) will constantly seek to re-price the order to ensure it is at the NBBO.
“The new PegTo algorithms provide a powerful dimension to options trading, enabling traders to implement new overlay and re-hedging strategies,” said Michael Tobey, manager of US options development at Bloomberg Tradebook, in a statement. “We believe these are particularly useful capabilities given the growth in the market and the continued institutionalisation of options trading.”