
[Federal Register Volume 76, Number 8 (Wednesday, January 12, 2011)]
[Notices]
[Pages 2158-2160]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-439]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63651; File No. SR-CBOE-2011-002]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change to Establish a $5 Strike Price Program

January 6, 2011.
    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 January 3, 2011, 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 Interpretation and Policy .01 to Rule 5.5 to 
allow CBOE to list and trade series in intervals of $5 or greater where 
the strike price is more than $200 in up to five option classes on 
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.

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 allow the Exchange to list 
and trade series in intervals of $5 or greater where the strike price 
is more than $200 in up to five option classes on individual stocks 
(``$5 Strike Price Program'') to provide investors and traders with 
additional opportunities and strategies to hedge high priced 
securities.
    Currently, Interpretation and Policy .01(e) to Rule 5.5 permits 
strike price intervals of $10 or greater where the strike price is 
greater than $200.\5\ The

[[Page 2159]]

Exchange is proposing to add the proposed $5 Strike Program as an 
exception to the $10 or greater program language in Rule 5.5.01(e). The 
proposal would allow the Exchange to list series in intervals of $5 or 
greater where the strike price is more than $200 in up to five option 
classes on individual stocks. The Exchange specifically proposes to 
create new subparagraph (f) to Rule 5.5.01 to provide:

    \5\ Interpretation and Policy .01(d) permits strike intervals of 
$2.50 or greater where the strike price is $25 or less and 
Interpretation and Policy .01(c) permits strike price intervals of 
$5 or greater where the strike price is greater than $25.

    The Exchange may list series in intervals of $5 or greater where 
the strike price is more than $200 in up to five (5) option classes 
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on individual stocks.

    The Exchange believes the $5 Strike Price Program would offer 
investors a greater selection of strike prices at a lower cost. For 
example, if an investor wanted to purchase an option with an expiration 
of approximately one month, a $5 strike interval could offer a wider 
choice of strike prices, which may result in reduced outlays in order 
to purchase the option. By way of illustration, using Google, Inc. 
(``GOOG'') as an example, if GOOG were trading at $610 \6\ with 
approximately one month remaining until expiration, the front month 
(one month remaining) at-the-money call option (the 610 strike) might 
trade at approximately $17.50 and the next highest available strike 
(the 620 strike) might trade at approximately $13.00. By offering a 615 
strike, an investor would be able to trade a GOOG front month call 
option at approximately $15.25, thus providing an additional choice at 
a different price point.
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    \6\ The prices listed in this example are assumptions and not 
based on actual prices. The assumptions are made for illustrative 
purposes only using the stock price as a hypothetical.
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    Similarly, if an investor wanted to hedge exposure to an underlying 
stock position by selling call options, the investor may choose an 
option term with two months remaining until expiration. An additional 
$5 strike interval could offer additional and varying yields to the 
investor. For example if Apple, Inc. (``AAPL'') were trading at $310 
\7\ with approximately two months remaining until expiration, the 
second month (two months remaining) at-the-money call option (the 310 
strike) might trade at approximately $14.50 and the next highest 
available strike (the 320) strike might trade at $9.90. If at 
expiration the price of AAPL closed at $310, the 310 strike call would 
have yielded a return of 4.68% and the 320 strike call would have 
yielded a return of 3.19% over the holding period. If the 315 strike 
call were available, that series might be priced at approximately 
$12.10 (a yield of 3.90% over the holding period) and would have had a 
lower risk of having the underlying stock called away at expiration 
than that of the 310 strike call.
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    \7\ The prices listed in this example are assumptions and not 
based on actual prices. The assumptions are made for illustrative 
purposes only using the stock price as a hypothetical.
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    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority have the necessary systems capacity 
to handle the potential additional traffic associated with the listing 
and trading of classes on individual stocks $5 Strike Price Program. 
The proposed $5 Strike Price Program would provide investors increased 
opportunities to improve returns and manage risk in the trading of 
equity options that overlie high priced stocks. In addition, the 
proposed $5 Strike Price Program would allow investors to establish 
equity options positions that are better tailored to meet their 
investment, trading and risk management requirements.
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 
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 the $5 Strike Price Program 
proposal will provide the investing public and other market 
participants increased opportunities because a $5 series in high priced 
stocks will provide market participants additional opportunities to 
hedge high priced securities. This will allow investors to better 
manage their risk exposure, and the Exchange believes the proposed $5 
Strike Price Program would benefit investors by giving them more 
flexibility to closely tailor their investment decisions in a greater 
number of securities. While the $5 Strike Price Program will generate 
additional quote traffic, the Exchange does not believe that this 
increased traffic will become unmanageable since the proposal is 
limited to a fixed number of classes. Further, the Exchange does not 
believe that the proposal will result in a material proliferation of 
additional series because it is limited to a fixed number of classes 
and the Exchange does not believe that the additional price points will 
result in fractured liquidity.
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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. 63654 (January 6, 
2011) (SR-Phlx-2010-158) (order approving establishment of a $5 
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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[[Page 2160]]

    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-2011-002 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-2011-002. 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-2011-002 and should be 
submitted on or before February 2, 2011.

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-439 Filed 1-11-11; 8:45 am]
BILLING CODE 8011-01-P


