
[Federal Register: October 26, 2010 (Volume 75, Number 206)]
[Notices]               
[Page 65687-65689]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc10-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63138; File No. SR-CBOE-2010-092]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Expand the $.50 Strike Price Program

October 20, 2010.
    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 October 12, 2010, 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 Rule 5.5 to: (i) Expand the $0.50 Strike 
Program for strike prices below $1.00; (ii) extend the $0.50 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. 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.

[[Page 65688]]

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 expand the $0.50 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 
$0.50, beginning at $0.50 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 1,000 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 $0.50 strike prices to options classes 
overlying no more than 20 individual stocks as specifically designated 
by the Exchange.
    Currently, Rule 5.5.01(b) permits strike price intervals of $0.50 
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 1,000 
contracts per day as determined by OCC during the preceding three 
calendar months. Further, the listing of $0.50 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 permitted within $0.50 of an existing strike 
price for classes also selected to participate in the $0.50 Strike 
Program.\5\
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    \5\ See Rule 5.5.01(a)(2) referring to $1 Strike Program.
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    The number of $0.50 strike options traded on the Exchange has 
continued to increase since the inception of the Program. There are now 
approximately 25 classes that participate in the $0.50 Strike Program 
listed, and traded, across all options exchanges including CBOE; 2 of 
which are classes chosen by CBOE for the $0.50 Strike Program. The 
current proposal would expand $0.50 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 marketplace.
    By way of example, suppose an investor wanted to invest in 5,000 
shares of Sirius Satellite (``SIRI'') on July 13, 2010. The closing 
price for SIRI on that day was $ 0.9678. If the investor wanted to buy 
a call option as an alternative to purchasing the shares outright for 
about $4,800, the lowest strike price available was the $1 strike, an 
out-of-the money option. However, if a $0.50 strike series had been 
available, the investor would have been able to control 5,000 shares by 
purchasing 50 exercisable in-the-money $0.50 strike call options. The 
Exchange notes that a 3-month SIRI call option with an implied 
volatility of 50 has a theoretical value of $0.47,\6\ or $47 per 
contract. Thus, the investor could have benefitted from the same upside 
potential as the stock purchase, but at a cost of only $2,350 ($47 per 
contract times 50 contracts).
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    \6\ Using a Black Scholes pricing model.
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    Similarly, if an investor wanted to hedge a position in SIRI stock 
with put options, the lowest available strike price was the $1 strike, 
an in-the-money option. If a $0.50 strike series had been available, 
the investor could have used 50 out-of-the-money puts for a fraction of 
the cost of buying 50 put options with a $1 strike price. The Exchange 
believes that investors deserve the opportunity to hedge downside risk 
in stocks trading less than $1.00 in the same manner as investors have 
with stocks trading 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,\7\ 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 her return by gaining more 
premium, while also benefitting from 29% of upside return in the 
underlying equity.
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    \7\ 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.
    By expanding the $0.50 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 Rule 5.5.01(a)(2) to add $5 and $6 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 $0.50 Strike Program, the following 
series are excluded from this prohibition: Strike prices of $2, $3, and 
$4. The Exchange proposes to add $5 and $6 to that list to account for 
the proposal to expand the $0.50 Strike Program to a strike price of 
$5.50.
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

[[Page 65689]]

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 that amending the current 
$0.50 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 
$0.50 Strike Program to allow a $0.50 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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    \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. 63132 (October 19, 
2010) (SR-Phlx-2010-118) (order approving expansion of $0.50 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 rule-comments@sec.gov. Please include 
File Number SR-CBOE-2010-092 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-2010-092. 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-2010-092 and should be 
submitted on or before November 16, 2010.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-27009 Filed 10-25-10; 8:45 am]
BILLING CODE 8011-01-P

