
[Federal Register: March 7, 2008 (Volume 73, Number 46)]
[Notices]               
[Page 12483-12485]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07mr08-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57410; File No. SR-CBOE-2007-96]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, to Amend the Quarterly Option 
Series Pilot Program To Permit the Listing of Additional Series

March 3, 2008.

I. Introduction

    On August 7, 2007, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend its rules relating to the quarterly 
option series (``QOS'') pilot program (``Pilot Program'') to permit the 
listing of additional series and to adopt a delisting program for 
outlying QOS series with no open interest. On January 17, 2008, the 
Exchange filed Amendment No. 1 to the proposed rule change. The 
proposed rule change, as amended, was published for comment in the 
Federal Register on January 28, 2008.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 57170 (January 18, 
2008), 73 FR 4927 (``Notice'').
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II. Description of the Proposal

    Current Exchange rules permit, on a pilot basis, the listing and 
trading of QOS in options on indexes or options on exchange-traded 
funds (``ETFs'') that satisfy the applicable listing criteria under 
CBOE rules.\4\ QOS trade based on

[[Page 12484]]

calendar quarters that end in March, June, September and December. The 
Exchange lists QOS that expire at the end of the next consecutive four 
calendar quarters, as well as the fourth quarter of the next calendar 
year. Currently, the Exchange lists QOS in five ETF options: (1) 
Nasdaq-100 Index Tracking Stock (QQQQ); (2) iShares Russell 2000 Index 
Fund (IWM); (3) DIAMONDS Trust, Series 1 (DIA); (4) Standard and Poor's 
Depositary Receipts/SPDRs (SPY); and (5) Energy Select SPDR (XLE).
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    \4\ See Securities Exchange Act Release No. 54123 (July 11, 
2006), 71 FR 40558 (July 17, 2006) (SR-CBOE-2006-65) (``Pilot 
Program Release''). Under the pilot program, the Exchange may list 
QOS in up to five currently listed option classes that are either 
options on ETFs or indexes. The Exchange is also permitted to list 
QOS in any options class that is selected by other securities 
exchanges that employ a similar pilot program under their respective 
rules.
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    CBOE Rule 5.5(e)(3) provides that the Exchange shall list strike 
prices for a QOS that are within $5 from the closing price of the 
underlying security on the preceding day. Recently, the Exchange has 
received requests from market participants to add additional strike 
prices for QOS that would be outside of the $5 price range for setting 
strikes (hereinafter ``+/-$5 range''). Investors and other market 
participants have advised the Exchange that they are buying and selling 
QOS options to trade volatility. In order to adequately replicate the 
desired volatility exposure, these market participants need to trade 
several option series, many having strike prices that fall outside the 
+/-$5 range currently allowed under the QOS rules.
    In addition, other participants have advised the Exchange that 
their investment strategies involve trading options tied to a 
particular option ``delta,'' \5\ rather than a particular level of the 
underlying security or index. At issue is the fact that delta depends 
on both the relative difference between the level of the underlying 
security or index and the option strike price, and time to expiration. 
For example, with IWM trading at $85 per share, the strike price 
corresponding to a ``25-delta'' IWM call (i.e., a call option with a 
delta of 25) with one month to expiration would be 89. However, the 
strike price corresponding to a ``25-delta'' IWM call with 3 months to 
expiration would be 93, and the strike price of a ``25-delta'' call 
with 1 year to expiration would be 106.
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    \5\ ``Delta'' is a measure of how an option price will change in 
response to a $1 price change in the underlying security or index. 
For example, an ABC option with a delta of ``50'' can be expected to 
change by $0.50 in response to a $1 change in the price of ABC.
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    In short, CBOE has been advised that the +/-$5 range for QOS in IWM 
options is insufficient to satisfy customer demand. In response, the 
Exchange proposes to amend Rule 5.5(e) to permit the Exchange to list 
strike prices for QOS in ETF options that fall within a percentage 
range (30%) above and below the price of the underlying ETF. 
Additionally, upon demonstrated customer interest, the Exchange also 
will be permitted to open additional strike prices of QOS in ETF 
options that are more than 30% above or below the current price of the 
underlying ETF. Market-Makers trading for their own account will not be 
considered when determining customer interest under this provision. In 
addition to the initial listed series, the proposal will permit the 
Exchange to list up to sixty (60) additional series per expiration 
month for each QOS in ETF options.
    The Exchange also is proposing to implement a delisting policy. 
Under the proposed delisting policy, the Exchange will, on a monthly 
basis, review QOS series that are outside a range of five (5) strikes 
above and five (5) strikes below the current price of the underlying 
ETF, and delist series with no open interest in both the put and the 
call series having a strike price: (i) higher than the highest strike 
price with open interest in the put and/or call series for a given 
expiration month; or (ii) lower than the lowest strike price with open 
interest in the put and/or call series for a given expiration month.\6\ 
Notwithstanding the proposed delisting policy, the Exchange will grant 
customer requests to add strikes and/or maintain strikes in QOS 
eligible for delisting.
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    \6\ For a detailed example of how the delisting policy will 
work, see Notice, supra note 3, at 4928.
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III. Commission's Findings and Order Granting Approval of the Proposed 
Rule Change

    After careful review and based on the Exchange's representations, 
the Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\7\ 
In particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act \8\ 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 of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Commission believes that the proposed expansion 
in the range and number of strike prices that the Exchange may list for 
QOS will provide investors with added flexibility in the trading of 
equity options and further the public interest by allowing investors to 
establish equity options positions that are better tailored to meet 
their investment objectives. The Commission also believes that the 
proposal strikes a reasonable balance between the Exchange's desire to 
accommodate market participants by offering a wider array of investment 
opportunities and the need to avoid unnecessary proliferation of 
options series and the corresponding increase in quotes. The Commission 
notes that the delisting policy proposed by the Exchange is designed to 
mitigate the number of options series with no open interest, which 
would reduce quote traffic accordingly.
    In approving the proposed rule change, the Commission has relied 
upon the Exchange's representation that it has the necessary systems 
capacity to support new options series that will result from this 
proposal. The Commission expects the Exchange to continue to monitor 
for option series with little or no open interest and trading activity 
and, consistent with the delisting policy approved today as part of 
this proposed rule change, to act promptly to delist such options. In 
addition, the Commission expects that CBOE will continue to monitor the 
trading volume associated with the additional option series listed as a 
result of this proposal and the effect of these additional series on 
market fragmentation and on the capacity of the Exchange's, OPRA's, and 
vendors' automated systems.
    Finally, the Commission notes that this rule change will become 
part of the pilot program and, going forward, its effects will be 
considered by the Commission in the event that the Exchange seeks to 
renew or make permanent the pilot program.\9\ Thus, in

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the Exchange's future reports on the Pilot Program, the Exchange should 
include analysis of (1) the impact of the additional series on the 
Exchange's market and quote capacity, and (2) the implementation and 
effects of the delisting policy, including the number of series 
eligible for delisting during the period covered by the report, the 
number of series actually delisted during that period (pursuant to the 
delisting policy or otherwise), and documentation of any customer 
requests to maintain QOS strikes that were otherwise eligible for 
delisting.
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    \9\ As set forth in the Pilot Program Release, if the Exchange 
were to propose an extension, expansion, or permanent approval of 
the Pilot Program, the Exchange must submit, along with any filing 
proposing such amendments to the program, a report that provides an 
analysis of the Pilot Program covering the entire period during 
which the Pilot Program was in effect. See Pilot Program Release, 
supra note 4. The Pilot Program Release requires the Exchange to 
include in its report, at a minimum: (1) Data and written analysis 
on the open interest and trading volume in the classes for which QOS 
were opened; (2) an assessment of the appropriateness of the option 
classes selected for the Pilot Program; (3) an assessment of the 
impact of the Pilot Program on the capacity of the Exchange, OPRA, 
and market data vendors (to the extent data from market data vendors 
is available); (4) any capacity problems or other problems that 
arose during the operation of the Pilot Program and how the Exchange 
addressed such problems; (5) any complaints that the Exchange 
received during the operation of the Pilot Program and how the 
Exchange addressed them; and (6) any additional information that 
would assist in assessing the operation of the Pilot Program.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-2007-96), as modified 
by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    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. E8-4389 Filed 3-6-08; 8:45 am]

BILLING CODE 8011-01-P
