[Federal Register Volume 75, Number 212 (Wednesday, November 3, 2010)]
[Notices]
[Pages 67799-67801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27701]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63206; File No. SR-BX-2010-073]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Expand
the $0.50 Strike Program
October 28, 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 27, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
proposed rule change as described in Items I and II 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 proposes to amend Chapter IV, Section 6 (Series of
Options Contracts Open for Trading) of the Rules of the Boston Options
Exchange Group, LLC (``BOX''), specifically BOX's $0.50 Strike Price
Program (the ``$0.50 Strike Program'' or ``Program'') \3\ 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 to those overlying
20 individual stocks. The text of the proposed rule change is available
from the principal office of the Exchange, on the Commission's Web site
at http://www.sec.gov, at the Commission's Public Reference Room, and
also on the
[[Page 67800]]
Exchange's Internet Web site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/.
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\3\ See Securities Exchange Act Release Nos. 60814 (October 13,
2009), 74 FR 53535 (October 19, 2009) (SR-BX-2009-63); and 61811
(March 31, 2010), 75 FR 17802 (April 7, 2010) (SR-BX-2010-25)
(notice of filing and immediate effectiveness permitting concurrent
listing of $3.50 and $4 strikes for classes in the $0.50 Strike and
$1 Strike Programs).
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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 these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to modify Chapter IV,
Section 6, Supplementary Material .06 of the BOX Rules 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 BOX.
Currently, Chapter IV, Section 6, Supplementary Material .06 of the
BOX Rules permits strike price intervals of $0.50 or greater beginning
at $1.00 where the strike price for the class is $3.50 or less, but
only for options 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 BOX. BOX 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.\4\
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\4\ See Chapter IV, Section 6, Supplementary Material .02(b)
referring to the $1 Strike Program.
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The number of $0.50 strike options traded on BOX has continued to
increase since the inception of the Program. There are now
approximately 25 options classes in the $0.50 Strike Program and they
are listed, and traded, across all options exchanges including BOX; two
of which are classes chosen by BOX for the $0.50 Strike Program. This
proposed rule change 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 market place.
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. BOX
notes that a 3-month SIRI call option with an implied volatility of 50
has a theoretical value of $0.47,\5\ or $47 per contract. Thus, by
investing in options with a $0.50 strike price, the investor could have
benefited from the same upside potential as the stock purchase, but at
a cost of only $2,350 (50 contracts at $47 per contract).
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\5\ 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 at the time was $1,
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. BOX 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 for the price of the underlying security
from $3.00 to $5.00 and expanding the number of $0.50 strikes available
for stocks priced 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, that investor would be able to choose the $4.50 strike which is
6% out-of-the- money or 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 the
position with a $5.50 strike option, the investor would have the
opportunity to sell the option at only 29% out-of-the-money, as
compared to 41%, and would improve her return by gaining more premium,
while also benefiting from 29% of upside return in the underlying
equity.
By increasing the number of securities underlying options classes
in the Program from 5 individual stocks to 20 individual stocks would
allow BOX to offer investors additional opportunities to use the $0.50
Strike Program. BOX notes that $0.50 strikes have had no material
impact on capacity. Further, BOX has observed the popularity of $0.50
strikes. Expanding the $0.50 Strike Program will allow investors to
better enhance returns and manage risk because they are provided
significantly greater flexibility in trading options that overlie lower
priced stocks. Expanding the Program will also allow investors to
establish equity options positions that are better tailored to meet
their investment, trading and risk needs.
The Exchange also proposes making a corresponding amendment to
Chapter IV, Section 6, Supplementary Material .02(b) of the BOX Rules
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. BOX proposes to add $5
and $6 to that list to account for the proposal to expand the $0.50
Strike Program to strike prices of up to $5.50.
Finally, the Exchange proposes to remove the following sentence:
Additionally, for an option class selected for the $1 Strike Price
Program, BOX may not list $1 Strike Prices on any series having greater
than nine (9)
[[Page 67801]]
months until expiration. This sentence should have been removed when
the Exchange expanded the $1 Strike Price Program in a limited fashion
to allow BOX to list new series in $1 intervals up to $5 in long-term
option series in up to 200 option classes on individual stocks.\6\
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\6\ See Securities Exchange Act Release No. 61041 (November 20,
2009), 74 FR 53535 (November 30, 2009) (SR-BX-2009-73).
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\7\ in general, and Section
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote
just and equitable principles of trade, to prevent fraudulent and
manipulative acts, to remove impediments to and perfect the mechanism
for a free and open market and a national market system and, in
general, to protect investors and the public interest. In particular,
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,
which does not exist today, to minimize losses associated with
declining stock prices. With the increase in actively traded, low-
priced securities, BOX 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 investors additional opportunity to
minimize and manage risk.
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\7\ 15 U.S.C. 78f(b).
\8\ 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
The Exchange has neither solicited nor received comments on 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 \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A).
\10\ 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
Commission has waived the five-day prefiling requirement in this
case.
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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.\11\
Therefore, the Commission designates the proposal operative upon
filing.\12\
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\11\ See Securities Exchange Act Release No. 63132 (October 19,
2010), 75 FR 65541 (October 25, 2010) (SR-Phlx-2010-118) (order
approving expansion of $0.50 Strike Price Program).
\12\ 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-BX-2010-073 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-BX-2010-073. 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-BX-2010-073 and should be
submitted on or before November 24, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27701 Filed 11-2-10; 8:45 am]
BILLING CODE 8011-01-P