

[Federal Register: September 24, 2007 (Volume 72, Number 184)]
[Notices]               
[Page 54306-54308]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24se07-78]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56449; File No. SR-CBOE-2007-52]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change as Modified by 
Amendment No. 1 Thereto Relating to $1 Strikes for VXD and VXN Options 
and $1 Strikes for RVX, VIX, VXD and VXN LEAPs

September 17, 2007.
    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 July 11, 2007, the Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') 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. On August 20, 2007, CBOE filed Amendment No. 1 to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, 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

    CBOE proposes rules that would permit the Exchange to: (i) List and 
trade CBOE Dow Jones Industrial Average Volatility Index (``VXD'') 
options and Nasdaq-100 Volatility Index (``VXN'') options in $1 strike 
price intervals; and (ii) list and trade CBOE Russell 2000 Volatility 
Index (``RVX''), VXD, VXN and CBOE Volatility Index (``VIX'') LEAPs in 
$1 strike price intervals. The text of the rule proposal is available 
on the Exchange's Web site (http://www.cboe.org/legal), at the 

Exchange's Office of the Secretary and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CBOE 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. CBOE 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 the proposed rule change is to permit the Exchange 
to list and trade options on the CBOE Dow Jones Industrial Average 
Volatility Index (``VXD'') and the Nasdaq-100 Volatility Index 
(``VXN'') in $1 strike price intervals within certain parameters 
described below.\3\ Additionally, the rule change proposes to permit 
the Exchange to list and trade CBOE Russell Volatility Index (``RVX''), 
CBOE Volatility Index (``VIX''), VXD, and VXN LEAPs in $1 strike price 
intervals within certain parameters also described below.
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    \3\ The SEC previously approved the listing and trading of VXD 
and VXN options, which the Exchange anticipates trading shortly. See 
Securities Exchange Act Release No. 49563 (April 14, 2004), 69 FR 
21589 (April 21, 2004) (approving SR-CBOE-2003-40).
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$1 Strikes for VXD and VXN Options

    Similar to other volatility indexes, VXD and VXN are calculated 
using real-

[[Page 54307]]

time quotes of out-of-the-money and at-the-money and second nearly 
index puts and calls on the Dow Jones Industrial Index (``DJIA'') and 
the Nasdaq-100 Index (``NDX'') respectively. VXD and VXN are quoted in 
absolute numbers that represent the volatility of the DJIA and the NDX 
respectively in percentage points per annum. For example, a VXD level 
of 11.63 (the closing value of the VXD on April 26, 2007) represents an 
annualized volatility of 11.637% in the DJIA Index and a VXN level of 
15.97 (the closing value of the VXN on April 26, 2007) represents an 
annualized volatility of 15.77% in the NDX.
    As with other proprietary CBOE volatility indexes, VXD and VXN 
levels fluctuate quite differently than individual equity securities or 
indexes of individual equity securities. Specifically, indexes such as 
VXD and VXN that track volatility are ``mean-reverting,'' a statistical 
term used to describe a strong tendency for the volatility index to 
move toward its long-term historical average level. In other words, at 
historically low volatility index levels, there is a higher probability 
that the next big move will be up rather than down. Conversely, at 
historically high volatility index levels, the next big move is more 
likely to be down rather than up.
    Thus, as exemplified by VXD and VXN, volatility indexes tend to 
move within set ranges, and even when a level moves outside that range, 
the tendency towards mean-reversion often results in the volatility 
index returning to a level within the range. In the case of VXD, the 
historical average index value since January 2, 2002 is 16.92. Since 
January 2002, VXD has fluctuated in a range between 9.28 and 41.85. 
Furthermore, VXD closed under 25 for 85% of the days on which the level 
was calculated since 2002 (1,171 days out of a total of 1,372 days) and 
has closed under 30 for 91% of the days on which the level was 
calculated since 2002 (1,245 days out of a total of 1,372 days). VXD 
has closed between 10 and 25 for 82% of the days on which the level was 
calculated since 2002 (1,130 days out of a total of 1,372 days).
    In the case of VXN, the historical average index value since 
January 2, 2002 is 26.14. Since January 2002, VXN has fluctuated in a 
range between 12.61 and 60.66. Furthermore, VXN closed under 25 for 61% 
of the days on which the level was calculated since 2002 (822 days out 
of a total of 1,355 days) and has closed under 30 for 73% of the days 
on which the level was calculated since 2002 (987 days out of a total 
of 1,355 days). VXN has closed between 15 and 30 for 66% of the days on 
which the level was calculated since 2002 (895 days out of a total of 
1,355 days).
    Because of the generally limited range in which VXD and VXN have 
fluctuated, the Exchange believes that investors will be better served 
if the Exchange is able to list $1 strike price intervals in VXD and 
VXN option series. To address this, the Exchange is proposing to list 
series at $1 or greater strike price intervals for each expiration on 
up to 5 VXD and VXN option series above and 5 VXD and VXN option series 
below the current index level.\4\ Additional series at $1.00 or greater 
strike price internals could be listed for each expiration as the 
current index levels of VXD and VXD, respectively, move from the 
exercise price of the VXD and VXN options series that already have been 
opened for trading on the Exchange in order to maintain at least 5 VXD 
and VXD option series above and 5 VXD and VXN option series below the 
current index levels respectively. As the current index level of RVX, 
VIX, VXD and VXN moves from the exercise price of those RVX, VIX, VXD 
and VXN options and LEAPs series that already have been opened for 
trading on the Exchange, the Exchange may open for trading additional 
series at $1.00 or greater strike price intervals for each expiration 
on up to 5 RVX, VIX, VXD and VXN option and LEAPs series above and 5 
RVX, VIX, VXD and VXN option and LEAPs series below the current index 
level.
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    \4\ The Commission previously approved the listing of VIX and 
RVX options at $1 strike intervals. See Securities Exchange Act 
Release No. 54192 (July 21, 2006), 71 FR 43251 (July 31, 2006) 
(approving SR-CBOE-2006-27); see also Securities Exchange Act 
Release No. 55425 (March 8, 2007), 72 FR 12238 (March 15, 2007) 
(approving SR-CBOE-2006-73).
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    For purposes of adding strike prices at $1.00 or greater strike 
price intervals, as well as at $2.50 or greater strike price intervals, 
the ``current index level'' would be defined as the ``implied forward 
level'' of VXN and VXD for each expiration.\5\ The Exchange believes 
that the $1 strike price intervals will more closely bracket the levels 
of VXN and VXD when it remains locked within a static range, as 
currently exists, and will enable investors to assume more dynamic 
volatility index option positions that reflect greater possibilities of 
settling in-the-month.
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    \5\ With respect to $2.50 or greater strikes, the $2.50 or 
greater strike price intervals will be reasonably related to the 
current index value of VXN and VXD at or about the time such series 
are first opened for trading. The term ``reasonably related to the 
current index value of the underlying index'' means that the 
exercise price is within 30% of the current index value. The 
Exchange may also open additional $2.50 or greater strike price 
series that are more than 30% away from the current index value, 
provided that demonstrated customer interest exists for such series, 
as expressed by institutional, corporate, or individual customers or 
their brokers. See Interpretations and Policies .01(d) and .04 of 
Rule 24.9.
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    The Exchange intends to determine implied forward levels of VXN and 
VXD through the use of VXN and VXD futures prices respectively. Its 
reasons for using this approach are explained below.
    By way of background, option prices reflect the market's 
expectation of the price of the underlying at expiration, which is 
referred to as the ``forward'' level. For stock indexes such as the 
DJIA and the NDX, the best estimate of the forward level is the 
current, or ``spot,'' price adjusted for the ``carry,'' which is the 
financing cost of owning the component stocks in the index less the 
dividends paid by those stocks. For volatility indexes such as VXD and 
VXN, a better estimate than the standard ``cash and carry'' model for 
calculating the forward levels of VXN and VXD at each expiration is 
reflected in the prices of the options that will be used to calculate 
VXN and VXD on that expiration day. For example, December 2007 DJIA 
options will be used to calculate VXD on the November 2007 VXD 
expiration date. Likewise, February 2008 VXN options are tied to the 
implied volatility of March 2008 NDX options, and so on.
    One important property of implied volatility is that it exhibits a 
``term structure.'' In other words, the implied volatility of options 
expiring on different dates can trade at different levels and can move 
independently. Another property related to the term structure is that 
implied volatility tends to trend toward the market's expectation of a 
long-term ``average'' value. As a result, a large spike in one-month 
implied volatility might not affect implied volatility of longer-dated 
options very much at all.
    The Exchange states that the VXD futures contract and the VXN 
futures contract were first listed for trading on CBOE Futures 
Exchange, LLC (``CFE'') on March 26, 2004 and July 6, 2007, 
respectively.\6\ The Exchange believes that traders will likely use VXD 
and VXN futures prices as a proxy for forward VXD and VXN levels. CBOE 
believes that using these prices is an accurate and transparent method 
for determining the ``current index level'' used to center the limited 
range in which $1 or greater strikes in VXD and

[[Page 54308]]

VXN options will be listed and the broader range in which $2.50 or 
greater strikes in VXD and VXN options will be listed.
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    \6\ The VIX futures contract was first listed for trading on CFE 
on March 26, 2004 and the RVX futures contract was first listed for 
trading on CFE on July 6, 2007.
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    Additionally, the Exchange is proposing that it would not list 
series with $1 intervals within $0.50 of an existing $2.50 strike price 
with the same expiration month (e.g., if there is an existing 12.50 
strike, the Exchange would not list a 12 or 13 strike).

$1 Strike LEAPs for RVX, VIX, VXN and VXD.

    Similar to the rationale advanced for $1 strikes for options, the 
Exchange is proposing rules to permit $1 strike intervals for RVX, VIX, 
VXD and VXN LEAPs. Typically, LEAPs strike prices moves in increments 
of $2.50 and $5.00 and such incremental pricing is suited for long-term 
contracts on traditional equity and stock index products. However, as 
discussed above, the levels of volatility indexes fluctuate quite 
differently than equities and stock indexes. As a ``mean-reverting'' 
product, volatility indexes gravitate towards their historical average 
levels; thus, limiting the range of movement.
    As with volatility index options, the Exchange is proposing to list 
series at $1 or greater strike price intervals for each expiration on 
up to 5 RVX, VIX, VXD and VXN LEAPs series above and 5 RVX, VIX, VXD 
and VXN LEAPs series below the current index level. As the current 
index level of RVX, VIX, VXD and VXN moves from the exercise price of 
those RVX, VIX, VXD and VXN options and LEAPs series that already have 
been opened for trading on the Exchange, the Exchange may open for 
trading additional series at $1.00 or greater strike price intervals 
for each expiration on up to 5 RVX, VIX, VXD and VXN option and LEAPs 
series above and 5 RVX, VIX, VXD and VXN option and LEAPs series below 
the current index level. For purposes of adding strike prices at $1.00 
or greater strike price intervals, as well as at $2.50 or greater 
strike price intervals, the ``current index level'' would be defined as 
the ``implied forward level'' of RVX, VIX, VXN and VXD for each 
expiration.

Capacity

    CBOE has analyzed its capacity and represents that it believes the 
Exchange and the Options Price Reporting Authority have the necessary 
systems capacity to handle the additional traffic associated with the 
listing and trading of the $1 strikes for VXD and VXN option and of the 
$1 strikes for RVX, VIX, VXD and VXN LEAPs.
2. Statutory Basis
    The Exchange believes this rule proposal is consistent with the Act 
and the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\7\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the Section 6(b)(5) Act \8\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest.
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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

    CBOE does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
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 neither solicited nor received comments on the 
proposal.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 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 self-regulatory organization consents, the Commission will:
    (A) By order approve 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, 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 rule-comments@sec.gov. Please include 

File Number SR-CBOE-2007-52 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2007-52. 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 inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
am and 3 pm. Copies of such filing also will be available for 
inspection and copying at the principal office of CBOE. 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-2007-52 and should 
be submitted on or before October 15, 2007..

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-18729 Filed 9-21-07; 8:45 am]

BILLING CODE 8010-01-P
