
[Federal Register: September 8, 2010 (Volume 75, Number 173)]
[Notices]               
[Page 54662-54664]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se10-120]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62799; File No. SR-Phlx-2010-118]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX, Inc. Relating to the $.50 Strike Price 
Program

August 30, 2010.
    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 August 25, 2010, NASDAQ OMX PHLX, Inc. (the ``Exchange'' or 
``Phlx'') 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. 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, pursuant to Section 19(b)(1) of the Act \3\ and Rule 
19b-4 thereunder,\4\ proposes to amend Commentary .05 to Exchange Rule 
1012, Series of Options Open for Trading, specifically the Exchange's 
$.50 Strike Price Program (the ``$.50 Strike Program'' or ``Program'') 
\5\ to: (i) Expand the $.50 Strike Program for strike prices below 
$1.00; (ii) extend the $.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 overlying 
20 individual stocks.
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    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ See Securities Exchange Act Release Nos. 60694 (September 
18, 2009), 74 FR 49048 (September 25, 2009) (SR-Phlx-2009-65) (order 
approving); and 61630 (March 2, 2010), 75 FR 11211 (March 10, 2010) 
(SR-Phlx-2010-26) (notice of filing and immediate effectiveness 
allowing concurrent listing of $3.50 and $4 strikes for classes that 
participate in both the $0.50 Strike Program and the $1 Strike 
Program).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, on the Commission's Web site 
at http://www.sec.gov, 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 Exchange 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 Exchange 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to modify Commentary 
.05 to Exchange Rule 1012 to expand the $.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 
$.50, beginning at $.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 1000 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 $.50 strike prices to options classes overlying no 
more than 20 individual stocks as specifically designated by the 
Exchange.
    Currently, Exchange Rule 1012 at Commentary .05 permits strike 
price intervals of $.50 or greater beginning at $1.00 where the strike 
price is $3.50 or less, but only for option 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 1000 contracts per day as determined by The Options Clearing 
Corporation during the preceding three calendar months. Further, the 
listing of $.50 strike prices is limited to options classes overlying 
no more than 5 individual stocks as specifically designated by the 
Exchange. The Exchange 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

[[Page 54663]]

permitted within $0.50 of an existing strike price for classes also 
selected to participate in the $0.50 Strike Program.\6\
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    \6\ See Exchange Rule 1012, Commentary .05(a)(i)(B) referring to 
the $1 Strike Program.
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    The number of $.50 strike options traded on the Exchange has 
continued to increase since the inception of the Program. There are now 
approximately 19 of the $.50 strike price option classes listed, and 
traded, across all options exchanges including Phlx; 5 of which are 
classes chosen by Phlx for the $0.50 Strike Program. The proposal would 
expand $.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, if an investor wants to invest in 5,000 shares 
of Sirius Satellite (``SIRI'') at $ 0.9678,\7\ the only choice the 
investor would have today would be to buy out-of-the-money calls, at 
the $1.00 strike, or to invest in the underlying stock with a total 
outlay of $.96 per share or $4,800. However, if a $.50 strike series 
were available, an investor may be able to invest in 5,000 shares by 
purchasing an exercisable in-the-money $.50 strike call option. It is 
reasonable to assume that with SIRI trading at $.96, the $.50 strike 
call option would trade at an estimated price of $.46 to $.48 under 
normal circumstances. This would allow the investor to manage 5,000 
shares with the same upside potential return for a cost of only $2,350 
(assuming $.47 as a call price).
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    \7\ SIRI was trading at $ 0.9678 on July 13, 2010.
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    Similarly, if an investor wanted to spend $4,800 for 5,000 shares 
of SIRI, a $.50 put option that would trade for $.01 to $.05 would 
provide protection against a declining stock price in the event that 
SIRI dropped below $.50 per share. In a down market, where high volume 
widely held shares drop below $1.00, investors deserve the opportunity 
to hedge downside risk in the same manner as investors have with stocks 
greater than $1.00.
    Increasing the threshold from $3.00 to $5.00 and expanding the 
number of $0.50 strikes available for stocks 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,\8\ that investor would be able to choose the 
$4.50 strike which is 6% out-of-the-money or they would be able to 
choose 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 with a $5.50 strike 
option, the investor would have the opportunity to sell the option at 
only 29% out-of-the-money and would improve their return by gaining 
more premium, while also benefitting from 29% of upside return in the 
underlying equity.
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    \8\ This was the price for C on July 14, 2010.
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    By increasing the number of securities from 5 individual stocks to 
20 individual stocks would allow the Exchange to offer investors 
additional opportunities to use the $0.50 strike program. The Exchange 
notes that $0.50 strikes have had no impact on capacity. Further, the 
Exchange has observed the popularity of $0.50 strikes. The open 
interest in the $2.50 August strike series for Synovus Financial Corp. 
(``SNV''), which closed at $2.71 on July 13, 2010, was 12,743 options; 
whereas open interest in the $2 and $3 August strike series was a 
combined 318 options. The open interest in the August $1.50 strike 
series for Ambac Financial Group, Inc. (``ABK''), which closed at 
$0.7490 on July 13, 2010, was 15,879 options compared to 8,174 options 
for the $2 strike series. The August $2.50 strike series had open 
interest of 22,280 options, also more than the traditional $2 strike 
series.
    By expanding the $.50 Strike Program investors would be able to 
better enhance returns and manage risk by providing investors with 
significantly greater flexibility in the trading of equity options that 
overlie lower price stocks by allowing investors to establish equity 
options positions that are better tailored to meet their investment, 
trading and risk.
    The Exchange also proposes making a corresponding amendment to 
Commentary .05(a)(i)(B) of Exchange Rule 1012 to add $5 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 $.50 Strike Program, the following 
series are excluded from this prohibition: strike prices of $2, $3, and 
$4. The Exchange proposes to add $5 to that list to account for the 
proposal to expand the $.50 Strike Program to a strike price of $5.50.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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. The Exchange believes that amending the current $.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 to minimize losses associated with declining stock prices 
which do not exist today. With the increase in active, low-prices 
securities, the Exchange believes that amending the $.50 Strike Program 
to allow a $.50 strike interval below $1 for strike prices of $5.50 or 
less is necessary to provide investor additional opportunity to 
minimize and manage risk.
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    \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

    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

    No written comments were either solicited or received.

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

    Within 45 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 Exchange consents, the Commission shall: (a) By order approve 
or disapprove 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,

[[Page 54664]]

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-Phlx-2010-118 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-Phlx-2010-118. 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 website 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-Phlx-2010-118 and should be 
submitted on or before September 29, 2010.

    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. 2010-22287 Filed 9-7-10; 8:45 am]
BILLING CODE 8010-01-P

