[Federal Register Volume 75, Number 206 (Tuesday, October 26, 2010)]
[Notices]
[Pages 65687-65689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27009]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63138; File No. SR-CBOE-2010-092]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Expand the $.50 Strike Price Program
October 20, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on October 12, 2010, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or the ``Exchange'') filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I and II below, which Items have been
prepared by the Exchange. The Exchange filed the proposal as a ``non-
controversial'' proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend Rule 5.5 to: (i) Expand the $0.50 Strike
Program for strike prices below $1.00; (ii) extend the $0.50 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. The text
of the rule proposal is available on the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's principal office, and at the
Commission's Public Reference Room.
[[Page 65688]]
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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to modify
Interpretation and Policy .01 to Rule 5.5 to expand the $0.50 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
$0.50, beginning at $0.50 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 1,000 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 $0.50 strike prices to options classes
overlying no more than 20 individual stocks as specifically designated
by the Exchange.
Currently, Rule 5.5.01(b) permits strike price intervals of $0.50
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 1,000
contracts per day as determined by OCC during the preceding three
calendar months. Further, the listing of $0.50 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 permitted within $0.50 of an existing strike
price for classes also selected to participate in the $0.50 Strike
Program.\5\
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\5\ See Rule 5.5.01(a)(2) referring to $1 Strike Program.
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The number of $0.50 strike options traded on the Exchange has
continued to increase since the inception of the Program. There are now
approximately 25 classes that participate in the $0.50 Strike Program
listed, and traded, across all options exchanges including CBOE; 2 of
which are classes chosen by CBOE for the $0.50 Strike Program. The
current proposal would expand $0.50 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 marketplace.
By way of example, suppose an investor wanted to invest in 5,000
shares of Sirius Satellite (``SIRI'') on July 13, 2010. The closing
price for SIRI on that day was $ 0.9678. If the investor wanted to buy
a call option as an alternative to purchasing the shares outright for
about $4,800, the lowest strike price available was the $1 strike, an
out-of-the money option. However, if a $0.50 strike series had been
available, the investor would have been able to control 5,000 shares by
purchasing 50 exercisable in-the-money $0.50 strike call options. The
Exchange notes that a 3-month SIRI call option with an implied
volatility of 50 has a theoretical value of $0.47,\6\ or $47 per
contract. Thus, the investor could have benefitted from the same upside
potential as the stock purchase, but at a cost of only $2,350 ($47 per
contract times 50 contracts).
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\6\ Using a Black Scholes pricing model.
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Similarly, if an investor wanted to hedge a position in SIRI stock
with put options, the lowest available strike price was the $1 strike,
an in-the-money option. If a $0.50 strike series had been available,
the investor could have used 50 out-of-the-money puts for a fraction of
the cost of buying 50 put options with a $1 strike price. The Exchange
believes that investors deserve the opportunity to hedge downside risk
in stocks trading less than $1.00 in the same manner as investors have
with stocks trading 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,\7\ 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 her return by gaining more
premium, while also benefitting from 29% of upside return in the
underlying equity.
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\7\ 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.
By expanding the $0.50 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 Rule 5.5.01(a)(2) to add $5 and $6 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 $0.50 Strike Program, the following
series are excluded from this prohibition: Strike prices of $2, $3, and
$4. The Exchange proposes to add $5 and $6 to that list to account for
the proposal to expand the $0.50 Strike Program to a strike price of
$5.50.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act \8\ and the rules and regulations thereunder and, in
particular, the requirements of Section 6(b) of the Act.\9\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \10\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
[[Page 65689]]
trade, to prevent fraudulent and manipulative acts, to remove
impediments to and to perfect the mechanism for 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
$0.50 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
$0.50 Strike Program to allow a $0.50 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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\8\ 15 U.S.C. 78s(b)(1).
\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
CBOE 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 solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not become operative for 30 days from the date on which it was filed,
or such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6) thereunder.\12\
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiver of the operative
delay is consistent with the protection of investors and the public
interest because the proposal is substantially similar to that of
another exchange that has been approved by the Commission.\13\
Therefore, the Commission designates the proposal operative upon
filing.\14\
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\13\ See Securities Exchange Act Release No. 63132 (October 19,
2010) (SR-Phlx-2010-118) (order approving expansion of $0.50 Strike
Price Program).
\14\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, 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-CBOE-2010-092 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-CBOE-2010-092. 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 Web site 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-CBOE-2010-092 and should be
submitted on or before November 16, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27009 Filed 10-25-10; 8:45 am]
BILLING CODE 8011-01-P