[Federal Register Volume 75, Number 173 (Wednesday, September 8, 2010)]
[Notices]
[Pages 54662-54664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22287]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62799; File No. SR-Phlx-2010-118]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by NASDAQ OMX PHLX, Inc. Relating to the $.50 Strike Price
Program
August 30, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 25, 2010, NASDAQ OMX PHLX, Inc. (the ``Exchange'' or
``Phlx'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Section 19(b)(1) of the Act \3\ and Rule
19b-4 thereunder,\4\ proposes to amend Commentary .05 to Exchange Rule
1012, Series of Options Open for Trading, specifically the Exchange's
$.50 Strike Price Program (the ``$.50 Strike Program'' or ``Program'')
\5\ to: (i) Expand the $.50 Strike Program for strike prices below
$1.00; (ii) extend the $.50 strike program to strike prices that are
$5.50 or less; (iii) extend the prices of the underlying security to at
or below $5.00; and (iv) extend the number of options classes overlying
20 individual stocks.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ See Securities Exchange Act Release Nos. 60694 (September
18, 2009), 74 FR 49048 (September 25, 2009) (SR-Phlx-2009-65) (order
approving); and 61630 (March 2, 2010), 75 FR 11211 (March 10, 2010)
(SR-Phlx-2010-26) (notice of filing and immediate effectiveness
allowing concurrent listing of $3.50 and $4 strikes for classes that
participate in both the $0.50 Strike Program and the $1 Strike
Program).
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The text of the proposed rule change is available on the Exchange's
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings,
at the principal office of the Exchange, on the Commission's Web site
at http://www.sec.gov, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to modify Commentary
.05 to Exchange Rule 1012 to expand the $.50 Strike Program in order to
provide investors with opportunities and strategies to minimize losses
associated with owning a stock declining in price.
The Exchange is proposing to establish strike price intervals of
$.50, beginning at $.50 for certain options classes where the strike
price is $5.50 or less and whose underlying security closed at or below
$5.00 in its primary market on the previous trading day and which have
national average daily volume that equals or exceeds 1000 contracts per
day as determined by The Options Clearing Corporation (``OCC'') during
the preceding three calendar months. The Exchange also proposes to
limit the listing of $.50 strike prices to options classes overlying no
more than 20 individual stocks as specifically designated by the
Exchange.
Currently, Exchange Rule 1012 at Commentary .05 permits strike
price intervals of $.50 or greater beginning at $1.00 where the strike
price is $3.50 or less, but only for option classes whose underlying
security closed at or below $3.00 in its primary market on the previous
trading day and which have national average daily volume that equals or
exceeds 1000 contracts per day as determined by The Options Clearing
Corporation during the preceding three calendar months. Further, the
listing of $.50 strike prices is limited to options classes overlying
no more than 5 individual stocks as specifically designated by the
Exchange. The Exchange is currently restricted from listing series with
$1 intervals within $0.50 of an existing strike price in the same
series, except that strike prices of $2, $3, and $4 shall be
[[Page 54663]]
permitted within $0.50 of an existing strike price for classes also
selected to participate in the $0.50 Strike Program.\6\
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\6\ See Exchange Rule 1012, Commentary .05(a)(i)(B) referring to
the $1 Strike Program.
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The number of $.50 strike options traded on the Exchange has
continued to increase since the inception of the Program. There are now
approximately 19 of the $.50 strike price option classes listed, and
traded, across all options exchanges including Phlx; 5 of which are
classes chosen by Phlx for the $0.50 Strike Program. The proposal would
expand $.50 strike offerings to market participants, such as traders
and retail investors, and thereby enhance their ability to tailor
investing and hedging strategies and opportunities in a volatile market
place.
By way of example, if an investor wants to invest in 5,000 shares
of Sirius Satellite (``SIRI'') at $ 0.9678,\7\ the only choice the
investor would have today would be to buy out-of-the-money calls, at
the $1.00 strike, or to invest in the underlying stock with a total
outlay of $.96 per share or $4,800. However, if a $.50 strike series
were available, an investor may be able to invest in 5,000 shares by
purchasing an exercisable in-the-money $.50 strike call option. It is
reasonable to assume that with SIRI trading at $.96, the $.50 strike
call option would trade at an estimated price of $.46 to $.48 under
normal circumstances. This would allow the investor to manage 5,000
shares with the same upside potential return for a cost of only $2,350
(assuming $.47 as a call price).
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\7\ SIRI was trading at $ 0.9678 on July 13, 2010.
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Similarly, if an investor wanted to spend $4,800 for 5,000 shares
of SIRI, a $.50 put option that would trade for $.01 to $.05 would
provide protection against a declining stock price in the event that
SIRI dropped below $.50 per share. In a down market, where high volume
widely held shares drop below $1.00, investors deserve the opportunity
to hedge downside risk in the same manner as investors have with stocks
greater than $1.00.
Increasing the threshold from $3.00 to $5.00 and expanding the
number of $0.50 strikes available for stocks under $5.00 further aids
investors by offering opportunities to manage risk and execute a
variety of option strategies to improve returns. For example, today an
investor can enhance their yield by selling an out-of-the-money call.
Using an example of an investor who wants to hedge Citigroup (``C'')
which is trading at $4.24,\8\ that investor would be able to choose the
$4.50 strike which is 6% out-of-the-money or they would be able to
choose the $5.00 strike which is 17.92% out-of-the-money, under this
proposal. Today, this investor only has the latter choice. Beyond that,
this investor today may choose the $6.00 strike which is 41% out-of-
the-money and offers significantly less premium. Pursuant to this
proposal if this investor had a choice to hedge with a $5.50 strike
option, the investor would have the opportunity to sell the option at
only 29% out-of-the-money and would improve their return by gaining
more premium, while also benefitting from 29% of upside return in the
underlying equity.
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\8\ This was the price for C on July 14, 2010.
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By increasing the number of securities from 5 individual stocks to
20 individual stocks would allow the Exchange to offer investors
additional opportunities to use the $0.50 strike program. The Exchange
notes that $0.50 strikes have had no impact on capacity. Further, the
Exchange has observed the popularity of $0.50 strikes. The open
interest in the $2.50 August strike series for Synovus Financial Corp.
(``SNV''), which closed at $2.71 on July 13, 2010, was 12,743 options;
whereas open interest in the $2 and $3 August strike series was a
combined 318 options. The open interest in the August $1.50 strike
series for Ambac Financial Group, Inc. (``ABK''), which closed at
$0.7490 on July 13, 2010, was 15,879 options compared to 8,174 options
for the $2 strike series. The August $2.50 strike series had open
interest of 22,280 options, also more than the traditional $2 strike
series.
By expanding the $.50 Strike Program investors would be able to
better enhance returns and manage risk by providing investors with
significantly greater flexibility in the trading of equity options that
overlie lower price stocks by allowing investors to establish equity
options positions that are better tailored to meet their investment,
trading and risk.
The Exchange also proposes making a corresponding amendment to
Commentary .05(a)(i)(B) of Exchange Rule 1012 to add $5 to $1 Strike
Program language that addresses listing series with $1 intervals within
$0.50 of an existing strike price in the same series. Currently, and to
account for the overlap with the $.50 Strike Program, the following
series are excluded from this prohibition: strike prices of $2, $3, and
$4. The Exchange proposes to add $5 to that list to account for the
proposal to expand the $.50 Strike Program to a strike price of $5.50.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest. The Exchange believes that amending the current $.50 Strike
Program will result in a continuing benefit to investors by giving them
more flexibility to closely tailor their investment decisions in a
greater number of securities. Investors would be provided with an
opportunity to minimize losses associated with declining stock prices
which do not exist today. With the increase in active, low-prices
securities, the Exchange believes that amending the $.50 Strike Program
to allow a $.50 strike interval below $1 for strike prices of $5.50 or
less is necessary to provide investor additional opportunity to
minimize and manage risk.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing,
[[Page 54664]]
including whether the proposed rule change is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml;) or
Send an e-mail to [email protected]. Please include
File Number SR-Phlx-2010-118 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2010-118. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-Phlx-2010-118 and should be
submitted on or before September 29, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22287 Filed 9-7-10; 8:45 am]
BILLING CODE 8010-01-P