
[Federal Register: September 25, 2009 (Volume 74, Number 185)]
[Notices]               
[Page 49055-49058]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25se09-150]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60695; File No. SR-CBOE-2009-069]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Strike Price Intervals of $0.50 for Options on 
Stocks Trading at or Below $3.00

September 18, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 17, 2009, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule

[[Page 49056]]

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, 
Series of Options Open for Trading, in order to establish strike price 
intervals of $0.50, beginning at $1, for certain options classes whose 
underlying security closed at or below $3 in its primary market on the 
previous trading day. The Exchange is also proposing to make a 
technical change to Rule 5.5. 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, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This proposed rule change is based on a filing submitted by NASDAQ 
OMX PHLX, Inc (``Phlx'') that was recently noticed for comment by the 
Commission.\5\
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    \5\ See Exchange Act Release No. 60466 (August 10, 2009), 74 FR 
41475 (August 17, 2009) (SR-Phlx-2009-65) (comment period expired 
September 8, 2009).
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    The purpose of the proposed rule change is to expand the ability of 
investors to hedge risks associated with stocks trading at or under $3. 
Currently, Interpretation and Policy .01(b) to Rule 5.5 provides that 
the interval of strike prices of series of options on individual stocks 
may be $2.50 or greater where the strike price is $25 or less. 
Additionally, Interpretation and Policy .01(a) to Rule 5.5 allows the 
Exchange to establish $1 strike price intervals (the ``$1 Strike 
Program'') on options classes overlying no more than fifty-five 
individual stocks designated by the Exchange. In order to be eligible 
for selection into the $1 Strike Program, the underlying stock must 
close below $50 in its primary market on the previous trading day. If 
selected for the $1 Strike Program, the Exchange may list strike prices 
at $1 intervals from $1 to $50, but no $1 strike price may be listed 
that is greater than $5 from the underlying stock's closing price in 
its primary market on the previous day. The Exchange may also list $1 
strikes on any other option class designated by another securities 
exchange that employs a similar $1 Strike Program its own rules.\6\ The 
Exchange is restricted from listing any series that would result in 
strike prices being within $0.50 of a strike price set pursuant to 
Interpretation and Policy .01(a) to Rule 5.5 at intervals of $2.50.
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    \6\ The Exchange may not list long-term option series 
(``LEAPS'') at $1 strike price intervals for any class selected for 
the Program.
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    The Exchange is now proposing to establish strike prices of $1, 
$1.50, $ 2, $2.50, $3 and $3.50 for certain stocks that trade at or 
under $3.00.\7\ The listing of these strike prices will be limited to 
options classes whose underlying security closed at or below $3 in its 
primary market on the previous trading day, and which have national 
average daily volume that equals or exceeds 1000 contracts per day as 
determined by The Options Clearing Corporation during the preceding 
three calendar months. The listing of $0.50 strike prices would be 
limited to options classes overlying no more than 5 individual stocks 
(the ``$0.50 Strike Program'') as specifically designated by the 
Exchange. The Exchange would also be able to list $0.50 strike prices 
on any other option classes if those classes were specifically 
designated by other securities exchanges that employed a similar $0.50 
Strike Program under their respective rules.
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    \7\ The Exchange recently amended Rule 5.4.01, Withdrawal of 
Approval of Underlying Securities, to eliminate the $3 market price 
per share requirement for continued approval for an underlying 
security. The amendment eliminated the prohibition against listing 
additional series or options on an underlying security at any time 
when the price per share of such underlying security is less than 
$3. The Exchange explained in that proposed rule change that the 
market price for a large number of securities has fallen below $3 in 
the current volatile market environment. See Securities Exchange Act 
Release No. 59336 (February 2, 2009), 74 FR 6332 (February 6, 2009) 
(SR-CBOE-2008-127).
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    Currently, the Exchange may list options on stocks trading at $3 at 
strike prices of $1, $2, $3, $4, $5, $6, $7 and $8 if they are 
designated to participate in the $1 Strike Program.\8\ If these stocks 
have not been selected for the Exchange's $1 Strike Program, the 
Exchange may list strike prices of $2.50, $5, $7.50 and so forth as 
provided in Interpretation and Policy .01(a) to Rule 5.5, but not 
strike prices of $1, $2, $3, $4, $6, $7 and $8.\9\
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    \8\ Additionally, market participants may be able to trade $2.50 
strikes on the same option at another exchange, if that exchange has 
elected not to select the stock for participation in its own similar 
$1 Strike Program.
    \9\ Again, market participants may also be able to trade the 
option at $1 strike price intervals on other exchanges, if those 
exchanges have selected the stock for participation in their own 
similar $1 Strike Program.
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    The Exchange is now proposing to amend Interpretation and Policy 
.01(b) to Rule 5.5 by adding new section (b) to list strike prices on 
options on a number of qualifying stocks that trade at or under $3.00, 
not simply those stocks also participating in the $1 Strike Program, in 
finer intervals of $0.50, beginning at $1 up to $3.50.\10\ Thus, a 
qualifying stock trading at $3 would have option strike prices 
established not just at $2.50, $5.00, $7.50 and so forth (for stocks 
not in the Exchange's $1 Strike Program) or just at $1, $2, $3, $4, $5, 
$6, $7 and $8 (for stocks designated to participate in the $1 Strike 
Program), but rather at strike prices established at $1, $1.50, $2, 
$2.50 $3 and $3.50.\11\
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    \10\ Current sections (b), (c) and (d) would be renumbered as 
sections (c), (d) and (e) respectively.
    \11\ The option on the qualifying stock could also have strike 
prices set at $5, $7.50 and so forth at $2.50 intervals (pursuant to 
Interpretation and Policy .01(a) to Rule 5.5) or, if it has been 
selected for the $1 Strike Program, at $4, $5, $6, $7 and $8.
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    The Exchange believes that current market conditions demonstrate 
the appropriateness of the new strike prices. Recently the number of 
securities trading below $3.00 has increased dramatically.\12\ Unless 
the underlying stock has been selected for the $1 Strike Program, there 
is only one possible in-the-money call (at $2.50) to be traded if an 
underlying stock trades at $3.00. Similarly, unless the underlying 
stock has been selected for the $1 Strike Program, only one out-of-the-
money strike price choice within 100% of a

[[Page 49057]]

stock price of $3 is available if an investor wants to purchase out-of-
the money calls. Stated otherwise, a purchaser would need over a 100% 
move in the underlying stock price in order to have a call option at 
any strike price other than the $5 strike price become in-the-money. If 
the stock is selected for the $1 Strike Program, the available strike 
price choices are somewhat broader, but are still greatly limited by 
the proximity of the $3 stock price to zero, and the very large percent 
gain or loss in the underlying stock price, relative to a higher priced 
stock, that would be required in order for strikes set at $1 or away 
from the stock price to become in-the-money and serve their intended 
hedging purpose.
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    \12\ As of September 10, 2009, stocks trading at or below $3 
include E*Trade Financial Corporation, Ambac Financial Group, Inc., 
Federal Home Loan Mortgage Corporation (Freddie Mac), Federal 
National Mortgage Association (Fannie Mae) and Sirius XM Radio, Inc. 
A number of these stocks are widely held and actively traded 
equities, and the options overlying these stocks also trade actively 
on CBOE.
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    As a practical matter, a low-priced stock by its very nature 
requires narrow strike price intervals in order for investors to have 
any real ability to hedge the risks associated with such a security or 
execute other related options trading strategies. The current 
restriction on strike price intervals, which prohibits intervals of 
less than $2.50 (or $1 for stocks in the $1 Strike Program) for options 
on stocks trading at or below $3, could have a negative effect on 
investors. The Exchange believes that the proposed $0.50 strike price 
intervals would provide investors with greater flexibility in the 
trading of equity options that overlie lower priced stocks by allowing 
investors to establish equity option positions that are better tailored 
to meet their investment objectives. The proposed new strike prices 
would enable investors to more closely tailor their investment 
strategies and decisions to the movement of the underlying security. As 
the price of stocks decline below $3 or even $2, the availability of 
options with strike prices at intervals of $0.50 could provide 
investors with opportunities and strategies to minimize losses 
associated with owning a stock declining in price. With regard to the 
impact on system capacity, CBOE has analyzed its capacity and 
represents that it and the Options Price Reporting Authority have the 
necessary systems capacity to handle the additional traffic associated 
with the listing and trading of an expanded number of series as 
proposed by this filing.
Technical Change
    The Exchange is proposing to clean up the strike setting parameters 
for options on exchange traded funds (``ETFs'') (also referred to as 
``Units'' in Interpretation and Policy .06 to Rule 5.3), which are 
codified in two different Interpretations and Policies to Rule 5.5. In 
1997, when the Exchange originally proposed trading ETF options, the 
Exchange amended Interpretation and Policy .01 to Rule 5.5. to provide 
that the minimum strike price intervals for ETF options would be $2.50 
where the strike price is $200 or less and $5.00 where the strike price 
is over $200.\13\ In 2002, the Exchange proposed permitting $1 strike 
price intervals for ETF options where the strike price is at $200 or 
less (and maintaining $5.00 strike price intervals where the strike 
price is over $200).\14\ The ability to list $1 strike price intervals 
for ETF options was codified at new Interpretation and Policy .08 to 
Rule 5.5 and no amendments were made to the existing strike setting 
parameters for ETF options set forth in Interpretation and Policy .01 
to Rule 5.5.
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    \13\ See Exchange Act Release No. 40166 (July 2, 1998), 63 FR 
37430 (July 10, 1998) (SR-CBOE-97-03).
    \14\ See Exchange Act Release No. 46507 (September 17, 2002), 67 
FR 60266 (September 25, 2002) (SR-CBOE-2002-54).
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    Accordingly, the Exchange is now proposing to amend Interpretations 
and Policies .01 and .08 to Rule 5.5 to set forth the strike setting 
parameters for ETF options in a single Interpretation and Policy (.08). 
This proposed change is technical in nature and makes no substantive 
changes to the strike setting parameters for ETF options. The Exchange 
is attempting to harmonize its rules by clarifying the strike setting 
parameters for ETF option in a single place.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act \15\ and the rules and regulations thereunder and, in 
particular, the requirements of Section 6(b) of the Act.\16\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \17\ 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, by expanding the ability of investors to hedge 
risks associated with stocks trading at or under $3. The proposal 
should create greater trading and hedging opportunities and 
flexibility, and provide customers with the ability to more closely 
tailor investment strategies to the price movement of the underlying 
stocks, trading in many of which is highly liquid.
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    \15\ 15 U.S.C. 78s(b)(1).
    \16\ 15 U.S.C. 78f(b).
    \17\ 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: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to 19(b)(3)(A) of the Act\18\ and Rule 19b-4(f)(6) 
thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 to permit the Exchange to compete effectively with Phlx 
by being able to list the same strike prices that will be permitted 
when SR-Phlx-2009-65 is approved. The Commission today has approved SR-
Phlx-2009-65,\20\ and therefore finds that waiver of the operative 
delay is consistent with the protection of investors and the public 
interest because such waiver will encourage fair competition among the 
exchanges. Therefore, the Commission designates the proposal operative 
upon filing.\21\
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    \20\ See Securities Exchange Act Release No. 60694 (September 
18, 2009) (SR-Phlx-2009-65) (order approving a $0.50 strike program 
substantially the same as the $0.50 Strike Program proposed by 
CBOE).
    \21\ 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

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Commission may summarily abrogate 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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2009-069 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-2009-069. 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 
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-2009-069 and should be 
submitted on or before October 16, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23111 Filed 9-24-09; 8:45 am]

BILLING CODE 8010-01-P
