
[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Notices]
[Pages 70337-70339]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-28899]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63304; File No. SR-ISE-2010-108]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Expand the $0.50 Strike Program

November 10, 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 November 10, 2010, the International Securities Exchange, LLC 
(``ISE'' 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 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 proposes to amend its rules 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 proposed rule change is available on the Exchange's Web 
site http://www.ise.com, 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 self-regulatory organization 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 this proposed rule change is to modify the 
Exchange's rules 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 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 $0.50 strike prices to options classes overlying 
no more than 20 individual stocks as specifically designated by the 
Exchange.
    Currently, Supplementary Material .05 to ISE Rule 504 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 1000 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

[[Page 70338]]

strike price for classes also selected to participate in the $0.50 
Strike Program.\3\
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    \3\ See Supplementary Material .01 to ISE Rule 504 referring to 
the $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 $0.50 Strike Program. 
There are now approximately 19 of the $0.50 strike price option classes 
listed, and traded, across all options exchanges including ISE; 3 of 
which are classes chosen by ISE 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 market place.
    By way of example, if an investor wants to invest in 5,000 shares 
of Sirius Satellite (``SIRI'') at $0.9678,\4\ 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 $0.96 per share or $4,800. However, if a $0.50 strike series 
were available, an investor may be able to invest in 5,000 shares by 
purchasing an exercisable in-the-money $0.50 strike call option. It is 
reasonable to assume that with SIRI trading at $0.96, the $0.50 strike 
call option would trade at an estimated price of $0.46 to $0.48 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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    \4\ 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 $0.50 put option that would trade for $0.01 to $0.05 would 
provide protection against a declining stock price in the event that 
SIRI dropped below $0.50 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,\5\ 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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    \5\ C was trading at $4.24 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 $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 
Supplementary Material .01 to ISE Rule 504 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 that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 \6\ (the ``Act'') in 
general, and furthers the objectives of Section 6(b)(5) of the Act \7\ 
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 $0.50 Strike Program would result in a 
continuing benefit to investors by giving them more flexibility to 
closely tailor their investment decisions in a greater number of 
securities. With the increase in active, low-price 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 investors with additional opportunity to minimize 
and manage risk.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is 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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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 
Commission has waived the five-day prefiling requirement in this 
case.

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[[Page 70339]]

    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.\10\ 
Therefore, the Commission designates the proposal operative upon 
filing.\11\
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    \10\ See Securities Exchange Act Release No. 63132 (October 19, 
2010) (SR-Phlx-2010-118) (order approving expansion of $0.50 Strike 
Price Program).
    \11\ 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-ISE-2010-108 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-ISE-2010-108. 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-ISE-2010-108 and should be 
submitted on or before December 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon.
Deputy Secretary.
[FR Doc. 2010-28899 Filed 11-16-10; 8:45 am]
BILLING CODE 8011-01-P


