The Chicago Board Options Exchange and HedgeStreet Inc. announced that they have created an alliance.

The CBOE, which bills itself as the world’s largest options exchange, is teaming up with HedgeStreet to develop new products, share technology services and marketing and support HedgeStreet’s binary options and futures products, known as “Hedgelets.”

HedgeStreet’s binary options are typically short-term, and are based on the value of the underlying instrument. The payout is determined by whether the option is in-the-money or not (they are sometimes referred to as “yes-no” or “cash-or-nothing” options).

HedgeStreet also offers futures Hedgelets, or “capped futures” contracts, which feature a variable payout depending on how much the underlying asset moves up or down. It currently offers contracts on commodities such as gasoline, crude oil and gold, as well as unique financial instruments such as housing prices, the Consumer Price Index and weekly mortgage rates.

Under the agreement, CBOE and HedgeStreet will collaborate on retail distribution of their contracts via joint marketing initiatives and will share certain technologies and hosting facilities. The agreement also involves an equity investment by CBOE in HedgeStreet. CBOE’s equity investment is part of a larger round of equity and debt financing recently closed by HedgeStreet, with a portion also provided by Norwest Ventures Partners, a venture capital firm active in technology and information services.

“CBOE is extremely pleased to join forces with HedgeStreet as we share a common culture of innovation and a willingness to develop new approaches to trading,” said CBOE chairman and CEO William Brodsky. “CBOE’s equity investment and alliance with HedgeStreet will serve to build momentum for binary options and this exciting new breed of futures products. We look forward to launching a new wave of jointly- developed one-of-a-kind products, while bringing HedgeStreet’s existing products to a broader audience.”

John Nafeh, chairman and founder of HedgeStreet said, “By combining HedgeStreet’s powerful online model with CBOE’s reach, financial strength and technology, we are creating a winning combination.”

“Because each of us brings complementary assets, we will be able to leverage our unique strengths to capture emerging opportunities and offer investors a multitude of new and interesting financial contracts online,” said HedgeStreet CEO Steve Race.

www.hedgestreet.com