What it means
The exchange was founded in Philadelphia in the late eighteenth century and for much of its history traded shares like other regional exchanges. Over time, it specialised in derivatives (contracts whose value depends on an underlying asset), becoming a pioneer in options on foreign currencies.
Today it operates mainly as an electronic options market. Nasdaq acquired the exchange in 2008, and it was renamed Nasdaq PHLX.
The name PHLX is still widely used in market data and in the names of indices. These include well-known sector benchmarks such as the semiconductor index, which many technology investors follow.
An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price on or before a date. Exchanges like PHLX list the contracts, match buyers with sellers and, through a clearing house, guarantee that each side honours the deal.
Standardisation of contract terms is what allows options to be traded easily. For corporate finance teams, PHLX matters most for currency hedging and for interpreting market indicators.
A company with foreign income might use currency options to protect against exchange rate moves, and its analysts may use sector indices to benchmark share price performance against peers. For investors, the exchange offers a broad menu of listed options on single shares and exchange-traded funds.
Options carry risk. Buyers can lose the whole premium, and sellers can face large losses if the market moves against them, so these instruments should be used with an understanding of their features.
Brokers require approvals and margin (a deposit) before allowing some strategies. Exchange structures change over time through mergers, new products and regulation, so facts about specific products and fees should be checked against current exchange documents.
The general role, as a venue for listed options and index products, has remained consistent.
In practice
Real-world examples.
Example
A US importer expects to pay a European supplier in six months and buys currency options on the exchange to cap the cost of the payment. If the exchange rate moves in her favour, she can let the option lapse and buy currency at the market rate. The cost of the options is a known amount at the outset, which makes budgeting easier for her finance team.
Example
An investor wants to protect a $200,000 portfolio of technology shares against a short-term fall. He buys put options on a sector exchange-traded fund, paying a premium that works as the cost of insurance. If the portfolio does not fall, the premium is the full cost of the protection, much like an unused insurance policy.
Example
A financial analyst compares the performance of a semiconductor manufacturer with the exchange's semiconductor index. She reports that the company has beaten the sector by 4 percentage points over the year. She also checks whether the index is weighted by size or equally, since this affects how closely it tracks the company's own results.
Formula
Calculation
Cost of an options position = premium per share x shares per contract x number of contracts
Standard equity option contracts usually cover 100 shares each.
Suppose an investor buys 10 call option contracts with a quoted premium of $2.50 per share. Each contract controls 100 shares, so the cost is 2.50 x 100 x 10 = $2,500. This is the most the buyer can lose, if the options expire worthless. If the underlying shares rose and the options were exercised or sold at a profit, the gain would be measured against this $2,500 cost.Case study
Seen in the real world.
Atlas Cable Systems is an illustrative, fictional exporter that invoices customers in a foreign currency. The treasurer worried that a stronger home currency would reduce the dollar value of its $8,000,000 of expected receipts.
She evaluated forward contracts, which lock in a rate, and currency options, which give protection while keeping the upside. Options cost a premium of $120,000, but they allowed the company to benefit if the currency moved in its favour.
The company chose options for half the exposure and forwards for the rest. The illustrative lesson is that exchange-traded options can provide flexibility, at a known cost. The treasurer wrote the decision into the hedging policy, including the maximum premium the company was willing to pay, so that future choices followed the same logic.
Watch out
Common mistakes.
- Assuming PHLX is still an independent exchange, when it is part of Nasdaq.
- Treating an options premium as a small cost without considering that it is lost if the option expires worthless.
- Confusing the exchange with the indices that carry its name.
Questions
People also ask.
What does PHLX stand for?
It stands for the Philadelphia Stock Exchange, now operated as Nasdaq PHLX.
What does the exchange trade today?
It is known mainly for stock and index options, currency options and sector index products.
Is it the oldest exchange in the United States?
It is generally described as the oldest, having been established in the late eighteenth century.
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