[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Notices]
[Pages 2158-2160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-439]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63651; File No. SR-CBOE-2011-002]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change to Establish a $5 Strike Price Program
January 6, 2011.
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 January 3, 2011, 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 Interpretation and Policy .01 to Rule 5.5 to
allow CBOE to list and trade series in intervals of $5 or greater where
the strike price is more than $200 in up to five option classes on
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.
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 allow the Exchange to list
and trade series in intervals of $5 or greater where the strike price
is more than $200 in up to five option classes on individual stocks
(``$5 Strike Price Program'') to provide investors and traders with
additional opportunities and strategies to hedge high priced
securities.
Currently, Interpretation and Policy .01(e) to Rule 5.5 permits
strike price intervals of $10 or greater where the strike price is
greater than $200.\5\ The
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Exchange is proposing to add the proposed $5 Strike Program as an
exception to the $10 or greater program language in Rule 5.5.01(e). The
proposal would allow the Exchange to list series in intervals of $5 or
greater where the strike price is more than $200 in up to five option
classes on individual stocks. The Exchange specifically proposes to
create new subparagraph (f) to Rule 5.5.01 to provide:
\5\ Interpretation and Policy .01(d) permits strike intervals of
$2.50 or greater where the strike price is $25 or less and
Interpretation and Policy .01(c) permits strike price intervals of
$5 or greater where the strike price is greater than $25.
The Exchange may list series in intervals of $5 or greater where
the strike price is more than $200 in up to five (5) option classes
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on individual stocks.
The Exchange believes the $5 Strike Price Program would offer
investors a greater selection of strike prices at a lower cost. For
example, if an investor wanted to purchase an option with an expiration
of approximately one month, a $5 strike interval could offer a wider
choice of strike prices, which may result in reduced outlays in order
to purchase the option. By way of illustration, using Google, Inc.
(``GOOG'') as an example, if GOOG were trading at $610 \6\ with
approximately one month remaining until expiration, the front month
(one month remaining) at-the-money call option (the 610 strike) might
trade at approximately $17.50 and the next highest available strike
(the 620 strike) might trade at approximately $13.00. By offering a 615
strike, an investor would be able to trade a GOOG front month call
option at approximately $15.25, thus providing an additional choice at
a different price point.
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\6\ The prices listed in this example are assumptions and not
based on actual prices. The assumptions are made for illustrative
purposes only using the stock price as a hypothetical.
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Similarly, if an investor wanted to hedge exposure to an underlying
stock position by selling call options, the investor may choose an
option term with two months remaining until expiration. An additional
$5 strike interval could offer additional and varying yields to the
investor. For example if Apple, Inc. (``AAPL'') were trading at $310
\7\ with approximately two months remaining until expiration, the
second month (two months remaining) at-the-money call option (the 310
strike) might trade at approximately $14.50 and the next highest
available strike (the 320) strike might trade at $9.90. If at
expiration the price of AAPL closed at $310, the 310 strike call would
have yielded a return of 4.68% and the 320 strike call would have
yielded a return of 3.19% over the holding period. If the 315 strike
call were available, that series might be priced at approximately
$12.10 (a yield of 3.90% over the holding period) and would have had a
lower risk of having the underlying stock called away at expiration
than that of the 310 strike call.
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\7\ The prices listed in this example are assumptions and not
based on actual prices. The assumptions are made for illustrative
purposes only using the stock price as a hypothetical.
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With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority have the necessary systems capacity
to handle the potential additional traffic associated with the listing
and trading of classes on individual stocks $5 Strike Price Program.
The proposed $5 Strike Price Program would provide investors increased
opportunities to improve returns and manage risk in the trading of
equity options that overlie high priced stocks. In addition, the
proposed $5 Strike Price Program would allow investors to establish
equity options positions that are better tailored to meet their
investment, trading and risk management requirements.
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
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 the $5 Strike Price Program
proposal will provide the investing public and other market
participants increased opportunities because a $5 series in high priced
stocks will provide market participants additional opportunities to
hedge high priced securities. This will allow investors to better
manage their risk exposure, and the Exchange believes the proposed $5
Strike Price Program would benefit investors by giving them more
flexibility to closely tailor their investment decisions in a greater
number of securities. While the $5 Strike Price Program will generate
additional quote traffic, the Exchange does not believe that this
increased traffic will become unmanageable since the proposal is
limited to a fixed number of classes. Further, the Exchange does not
believe that the proposal will result in a material proliferation of
additional series because it is limited to a fixed number of classes
and the Exchange does not believe that the additional price points will
result in fractured liquidity.
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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. 63654 (January 6,
2011) (SR-Phlx-2010-158) (order approving establishment of a $5
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-2011-002 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-2011-002. 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-2011-002 and should be
submitted on or before February 2, 2011.
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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-439 Filed 1-11-11; 8:45 am]
BILLING CODE 8011-01-P