
[Federal Register Volume 76, Number 37 (Thursday, February 24, 2011)]
[Notices]
[Pages 10412-10414]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-4075]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63927; File No. SR-CBOE-2011-008]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change To Permit the Listing of 
$0.50 and $1 Strike Price Increments on Certain Options Used To 
Calculate Volatility Indexes

February 17, 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 4, 2011, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed with the Securities and 
Exchange Commission (the ``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

    CBOE proposes to amend Rules 5.5 and 24.9 to permit the listing of 
strike prices in $0.50 intervals where the strike price is less than 
$75, and strike prices in $1.00 intervals where the strike price is 
between $75 and $150 for option series used to calculate volatility 
indexes. The text of the rule proposal is available on the Exchange's 
Web site (http://www.cboe.org/legal), at the principal office of the 
Exchange, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to permit the Exchange 
to list strike prices in $0.50 intervals where the strike price is less 
than $75, and strike prices in $1.00 intervals where the strike price 
is between $75 and $150 for option series \3\ used to calculate 
volatility indexes.
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    \3\ For example, CBOE calculates the CBOE Gold ETF Volatility 
Index (``GVZ''), which is based on the VIX methodology applied to 
options on the SPDR Gold Trust (``GLD''). The current filing would 
permit $0.50 strike price intervals for GLD options where the strike 
price is $75 or less. CBOE is currently permitted to list strike 
prices in $1 intervals for GLD options (where the strike price is 
$200 or less), as well as for other exchange-traded fund (``ETF'') 
options. See Rule 5.5.08.
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    To effect this change, the Exchange is proposing to add new 
Interpretation and Policy .19 to Rule 5.5, Series of Option Contracts 
Open for Trading, and new Interpretation and Policy .12 to Rule 24.9, 
Terms of Index Option Contracts. These new provisions will permit the 
listing of strike prices in $0.50 intervals where the strike price is 
less than $75, and strike prices in $1.00 intervals where the strike 
price is between $75 and $150 for option series used to calculate 
volatility indexes. The Exchange is also proposing to amend 
Interpretation and Policy .08 to Rule 5.5 to permit $0.50 strike price 
intervals for options on exchange-traded funds that are used to 
calculate a volatility index by cross-referencing Rule 5.5.19.
    The CBOE Volatility Index (``VIX'') is widely recognized as a 
benchmark measure of the expected volatility of the S&P 500 Index. In 
less than four years of trading, VIX options have become the second 
most actively traded index option class in the U.S., averaging 248,000 
contracts per day in 2010. Combined trading activity in listed VIX 
options and futures in 2010 accounted for over $42 million of ``vega'' 
(the unit of trading commonly used for over-the-counter (``OTC'') 
volatility contracts) per day, which represents a significant portion 
of all volatility trading executed in both listed and OTC markets.
    The VIX methodology is derived from a body of research showing that 
it is possible to create pure exposure to volatility by assembling a 
special portfolio of options. While the price of a single option 
depends on both the underlying price and volatility, this special 
portfolio is constructed, in the aggregate, to eliminate the stock 
price dependence. In theory, this option portfolio would be comprised 
of an

[[Page 10413]]

infinite number of options with continuous strike prices. In practice, 
however, the options that are used to calculate VIX--as well as other 
volatility indexes--are finite in number and are subject to a minimum 
interval between strike prices. As such, the VIX methodology was 
designed to accommodate certain limitations inherent in ``real-world'' 
options trading, such as a limited number of available options.
    CBOE and CBOE Futures Exchange, LLC (``CFE'') list options and 
futures on the VIX, which is calculated using S&P 500 Index (``SPX'') 
options. The Exchange believes that one of the reasons for the success 
of products based on the VIX is a widespread recognition that VIX is an 
accurate and reliable measure of expected volatility. CBOE has found 
that both the range of strike prices for option series used in the VIX 
calculation and the interval between the strike prices (measured as a 
percentage of the underlying SPX value) of those options are important 
factors contributing to the calculation of a meaningful index value. 
The Exchange notes that the minimum strike price interval for SPX 
options is $5.00, which is 0.4% of the underlying index level of 
1286.12 as of January 31, 2011. The permissible strike price interval 
for SPX options allows approximately 200 to 250 SPX series to be 
included in the VIX calculation on a typical day. Additionally, CBOE 
endeavors to list enough SPX options to ensure that the actual option 
listings do not deviate too far from the theoretical assumptions 
underpinning the VIX methodology.
    As CBOE seeks to apply the VIX methodology to options on ETFs and 
individual equity securities, the Exchange believes that it is 
appropriate to use option series that are comparable, in terms of 
strike price range and strike price interval, to SPX option series in 
order to calculate volatility index values that are recognized to be as 
accurate and reliable as the VIX values. The Exchange believes that 
allowing equivalent strike price intervals for options overlying single 
stocks, ETFs and indexes with prices of $150 or less, will allow the 
Exchange to calculate volatility indexes that are better estimates of 
the expected volatility of option classes with underlying prices that 
are low relative to the level of the S&P 500. For example, the minimum 
strike price interval for United States Oil Fund, LP (``USO'') options, 
the underlying for the CBOE Crude Oil ETF Volatility Index (``OVX''), 
is $1. When this is measured in absolute terms it appears to be five 
times narrower than the minimum strike interval for SPX options. 
However, the relevant measurement for a volatility index is the strike 
price interval as a percentage of the price of underlying; by applying 
this metric, the strike price interval for USO options is 2.6%,\4\ more 
than six times wider than SPX. Due to the limited permissible strike 
price interval for USO options, only about 40 to 60 USO options are 
used to calculate OVX on a typical day. This is despite covering a 
wider range of strike prices than the strike price range of SPX options 
that are used to calculate VIX. The Exchange notes that the SPX-
equivalent strike price interval for a $100 stock or ETF would be 
approximately $0.40, less than the $0.50 or $1.00 intervals 
contemplated in this proposal.
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    \4\ The closing price for USO shares on January 31, 2011 was 
$38.61.
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    The Exchange believes that its proposal will limit the expansion of 
strike prices because it will only apply to options that are used to 
calculate a volatility index. Further limiting the expansion of strike 
prices, the Exchange is proposing to list series in $0.50 intervals 
only for strike prices less than $75 and $1.00 intervals for strike 
prices between $75 and $150.
Capacity
    CBOE has analyzed its capacity and represents that it believes the 
Exchange and the Options Price Reporting Authority have the necessary 
systems capacity to handle the additional traffic associated with the 
listing strike prices in $0.50 intervals where the strike price is less 
than $75, and strike prices in $1.00 intervals where the strike price 
is between $75 and $150 for option series used to calculate volatility 
indexes that would result from the current rule filing.
2. Statutory Basis
    The Exchange believes this rule proposal is consistent with the Act 
and the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\5\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the Section 6(b)(5) Act \6\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest, and believes that the proposed limited expansion of strike 
prices will enable the calculation of volatility indexes that are 
recognized to be as accurate and reliable as VIX values. While this 
proposal will generate additional quote traffic, the Exchange does not 
believe that this increased traffic will become unmanageable since the 
proposal is restricted to a limited number of classes. Further, the 
Exchange does not believe that the proposal will result in a material 
proliferation of additional series because it is restricted to a 
limited number of classes.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 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

    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 self-regulatory organization consents, the Commission will:
    (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-CBOE-2011-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

[[Page 10414]]

Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-1090.

All submissions should refer to File Number SR-CBOE-2011-008. 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-2011-008 and should be 
submitted on or before March 17, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-4075 Filed 2-23-11; 8:45 am]
BILLING CODE 8011-01-P


