
[Federal Register Volume 76, Number 35 (Tuesday, February 22, 2011)]
[Notices]
[Pages 9846-9849]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3801]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63914; File No. SR-Phlx-2011-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by NASDAQ OMX PHLX LLC to Expand the $2.50 Strike Price Program

February 15, 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 February 2, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or 
``Exchange'') filed with the

[[Page 9847]]

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 Exchange Rule 1012, Series of 
Options Open for Trading, to expand the $2.50 Strike Price Program.\5\
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78s(b)(1).
    \4\ 17 CFR 240.19b-4.
    \5\ See Securities Exchange Act Release No. 33063 (October 18, 
1993), 58 FR 54619 (October 18, 1993) (SR-Phlx-93-18) (a rule change 
to list strike price intervals of $2.50 or greater for individual 
stock options). See also Securities Exchange Act Release Nos. 52961 
(December 15, 2005), 70 FR 76095 (December 15, 2005) (SR-Phlx-2005-
77) (a rule change to allow list options with $2.50 strike price 
intervals for options with strike prices between $50 and $75); and 
55338 (February 23, 2007), 72 FR 9371 (March 1, 2007) (SR-Phlx-2007-
04) (a rule change to list LEAPS at $2.50 strike price intervals).
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, at the Commission's 
Public Reference Room, and on the Commission's Web site at http://
www.sec.gov.

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 expand the current 
$2.50 Strike Price Program (``Program'') \6\ to permit the listing of 
options with $2.50 strike price intervals for options with strike 
prices between $50 and $100, provided the $2.50 strike price intervals 
are no more than $10 from the closing price of the underlying stock in 
the primary market.\7\ Additionally, the Exchange proposes to increase 
the number of option classes on individual stocks for which the 
intervals of strike prices will be $2.50 to 60 options classes.
---------------------------------------------------------------------------

    \6\ Initially adopted in 1995 as a pilot program, the options 
exchanges at that time were permitted to list options with $2.50 
strike price intervals up to $50 on a total of up to 100 option 
classes. In 1998, the pilot program was expanded and permanently 
approved to allow the options exchanges collectively to select up to 
200 option classes on which to list options with $ 2.50 strike price 
intervals up to $ 50. Of the current 200 options classes eligible 
for the Program, 46 have been allocated to the Exchange. In 
addition, each options exchange is permitted to list options with 
$2.50 strike price intervals on any option class that another 
options exchange selects under its Program. See Securities Exchange 
Act Release Nos. 35993 (July 19, 1995), 60 FR 38073 (July 25, 1995) 
(approving File Nos. SR-Phlx-95-08, SR-Amex-95-12, SR-PSE-95-07, SR-
CBOE-95-19, and SR-NYSE-95-12); and 40662 (November 12, 1998), 63 FR 
64297 (November 19, 1998) (approving File Nos. SR-Amex-98-21, SR-
CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
    \7\ The term ``primary market'' is defined in Exchange Rule 1000 
in respect of an underlying stock or exchange-traded fund share as 
the principal market in which the underlying stock or exchange-
traded fund share is traded.
---------------------------------------------------------------------------

    Currently, Exchange Rule 1012 at Commentary .05 permits the listing 
of options with $2.50 strike price intervals for options with strike 
prices between $50 and $75.\8\ Specifically, the Exchange proposes to 
amend Commentary .05 to Exchange Rule 1012 to amend the current text.
---------------------------------------------------------------------------

    \8\ Commentary .05 of Exchange Rule 1012 also permits strike 
price intervals of $5.00 or greater where the strike price is 
greater than $25 but less than $200; and $2.50 or greater where the 
strike price is $25 or less and $10 or greater where the strike 
price is $200 or more, except as provided otherwise in Rule 1012.
---------------------------------------------------------------------------

    For example, consider a hypothetical where Caterpillar, Inc. 
(``CAT'') was trading at $81. With approximately one month remaining 
until expiration, and with a front month at-the-money put option (the 
80 strike) trading at approximately $1.30, the investor would be able 
to purchase a $77.50 strike put at an estimated $.60 per contract. 
Today, the next available strike of a one month put option is the 75 
strike. While the 75 strike put would certainly trade at a lesser price 
than the 80 strike put,\9\ the protection offered would only take 
effect with a 7.40% decline in the market as opposed to a 4.30% decline 
in the market. The additional choice would provide the investor an 
additional to hedge exposure (the opportunity to hedge with a reduced 
outlay) and thereby minimize risk if there were a decline in the stock 
price of CAT.
---------------------------------------------------------------------------

    \9\ The 75 strike put would trade at $.30 in this example.
---------------------------------------------------------------------------

    Another example would be if an investor desired to sell call 
options to hedge the exposure of an underlying stock position and 
enhance yield. Consider a hypothetical where CAT was trading at $81 and 
the second month (two months remaining) of a recently out-of-the-money 
call option (the 85 strike) was trading at approximately $2.35. If the 
investor where to sell the 85 call against an existing stock position, 
the investor could yield a return of approximately 2.90% over a two 
month period or an annualized return of 17.4%. By providing an 
additional $2.50 strike interval above $75, the investor would have the 
opportunity to sell the 82.50 strike instead of the 85 strike. If the 
85 strike call were trading at $2.35, the 82.50 strike call would trade 
at approximately 3.30. By selling the 82.50 strike call at 3.30 against 
an existing stock position, the investor could yield a 4.07% return 
over a two month period or an annualized 24.40% return. Therefore, an 
additional choice of a $2.50 strike interval could afford varying 
yields to the investor.
    The Exchange believes that the Program has to date created 
additional trading opportunities for investors, thereby benefiting the 
marketplace. The existence of $2.50 strike prices with strike intervals 
above $75 affords investors the ability to more closely tailor 
investment strategies to the precise movement of the underlying 
security and meet their investment, trading and risk management 
requirements.
    The Exchange is also proposing to increase the number of option 
classes on individual stocks for which the intervals of strike prices 
will be $2.50 to 60 options classes. Currently, the Exchange may select 
up to 46 options classes on individual stocks for which the intervals 
of strike prices will be $2.50. Initially adopted in 1995 as a pilot 
program, the options exchanges at that time were permitted to list 
options with $2.50 strike price intervals up to $50 on a total of up to 
100 option classes.\10\ In 1998, the pilot program was expanded and 
permanently approved to allow the options exchanges collectively to 
select up to 200 option classes on which to list options with $2.50 
strike price intervals

[[Page 9848]]

up to $50.\11\ Of the current 200 options classes eligible for the 
Program, 46 have been allocated to the Exchange.\12\ In addition, each 
options exchange is permitted to list options with $2.50 strike price 
intervals on any option class that another options exchange selects 
under its program.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 35993 (July 19, 
1995), 60 FR 38073 (July 25, 1995) (approving File Nos. SR-Phlx-95-
08, SR-Amex-95-12, SR-PSE-95-07, SR-CBOE-95-19, and SR-NYSE-95-12).
    \11\ See Securities Exchange Act Release No. 40662 (November 12, 
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
    \12\ See Securities Exchange Act Release No. 40662 (November 12, 
1998), 63 FR 64297 (November 19, 1998) (approving File Nos. SR-Amex-
98-21, SR-CBOE-98-29, SR-PCX-98-31, and SR-Phlx-98-26).
---------------------------------------------------------------------------

    Since 1998, the 200 options classes have not been expanded, 
although increasingly more companies have completed initial public 
offerings from 1998 through 2010. Additionally, significantly more 
options classes are trading in 2010 as compared to 1998. The Exchange 
proposes to increase its allocation from 46 to 60 \13\ options classes 
to accommodate investor requests for $2.50 strikes in certain options 
classes. The Exchange believes that offering additional options classes 
would benefit investors.
---------------------------------------------------------------------------

    \13\ Currently, The Chicago Board Options Exchange, Incorporated 
(``CBOE'') has an allocation of 60 options.
---------------------------------------------------------------------------

    Furthermore, the Exchange does not believe that this proposal would 
have a negative impact on the marketplace. The Exchange would compare 
this proposal with the $1 Strike Price expansion, wherein the Exchange 
expanded its $1 Strike Price Program from 55 individual stocks to 150 
individual stocks on which an option series may be listed at $1 strike 
price intervals.\14\ The Exchange believes that this proposal, wherein 
the Exchange is proposing to increase its allocation from 46 to 60 
options classes is substantially less than the $1 Strike Price Program 
increase and therefore would have less impact than that program, which 
has not had any negative impact on the market in terms of proliferation 
of quote volume or fragmentation.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 62420 (June 30, 
2010), 75 FR 39593 (July 9, 2010) (SR-Phlx 2010-72).
---------------------------------------------------------------------------

    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 system capacity to 
handle the potential additional traffic associated with the listing and 
trading of classes on individual stocks in the $2.50 Strike Price 
Program.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act\16\ 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 the effect of the proposed expansion on the 
marketplace would not result in a material proliferation of quote 
volume or concerns with fragmentation. In addition, the Exchange 
believes that it has the necessary system capacity to handle the 
potential additional traffic associated with the listing and trading of 
classes.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Rather, the Exchange believes the $2.50 Strike Price Program 
proposal would provide the investing public and other market 
participants increased opportunities to better manage their risk 
exposure. Accordingly, the Exchange believes that the proposal to 
expand the Program to allow the listing of options with $2.50 strike 
price intervals for options with strike prices between $50 and $100 
should further benefit investors and the market by providing greater 
trading opportunities for those underlying stocks that have low 
volatility and thus trade in a narrow range.

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, 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-2011-15 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-2011-15. 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-Phlx-2011-15 and should be 
submitted on or before March 15, 2011.


[[Page 9849]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3801 Filed 2-18-11; 8:45 am]
BILLING CODE 8011-01-P


