
[Federal Register Volume 76, Number 66 (Wednesday, April 6, 2011)]
[Notices]
[Pages 19169-19171]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8123]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34-64159; File No. SR-CBOE-2011-029]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Expand the $2.50 Strike Price Program

March 31, 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 March 30, 2011, the Chicago Board Options Exchange, 
Incorporated (the ``Exchange'' or ``CBOE'') filed with the Securities 
and Exchange Commission (``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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Rule 5.5 to expand the Exchange's $2.50 
Strike Price Program (the ``Program'') 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. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend Rule 5.5 to 
expand the Program 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.
    The $2.50 Strike Price Program was initially adopted in 1995 as a 
joint pilot program of the options exchanges, whereby the options 
exchanges were permitted to list $2.50 strike prices up to $50 on a 
total of up to 100 option classes.\5\ The Program was later permanently 
approved and expanded in 1998 to allow the options exchanges to select 
up to 200 classes on which to list $2.50 strike prices up to $50.\6\ Of 
these 200 option classes eligible for the Program, 60 classes have been 
allocated to CBOE pursuant to a formula approved by the SEC.\7\ Each 
options exchange, however, is permitted to list $2.50 strike prices on 
any option class that another exchange selects as part of the Program. 
In 2005, the Program was amended once again to allow the listing of 
$2.50 strike prices between $50 and $75.\8\ The Exchange now proposes 
to allow the listing of $2.50 strike prices between $50 and $100. 
Below, CBOE provides two examples in support of its request to expand 
the strike setting parameters of the Program.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 34-35993 (July 19, 
1995), 60 FR 38073 (July 25, 1995) (SR-CBOE-95-19).
    \6\ See Securities Exchange Act Release No. 34-40662 (November 
12, 1998), 63 FR 64297 (November 19, 1998) (SR-CBOE-98-29).
    \7\ Id.
    \8\ See Securities Exchange Act Release No. 34-52892 (December 
5, 2005), 70 FR 73492 (December 12, 2005). (SR-CBOE-2005-39).
---------------------------------------------------------------------------

    For example, consider a hypothetical stock XYZ, Inc., 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 would be 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 opportunity 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 XYZ.
---------------------------------------------------------------------------

    \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 XYZ was trading at $81 and 
a 2-month call option with a strike price of 85 was trading at 
approximately $2.35. If the investor were to sell the 85 call against 
an existing stock position, the investor could collect a premium equal 
to 2.90% of the XYZ share price, which would provide a cushion against 
a share price decline to $78.65. It would also provide enhanced returns 
relative to holding the stock alone, provided that the price of XYZ was 
below $87.35 at expiration. By providing an additional $2.50 strike 
interval above $75, the investor would have the opportunity to sell the 
82.50

[[Page 19170]]

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 collect a premium equal to 4.07% of the 
XYZ share price, which would provide a cushion against a share price 
decline to $77.70. It would also provide enhanced returns relative to 
holding the stock alone, provided that the price of XYZ was below 
$85.80 at expiration. 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.
    Finally, the Exchange represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to support the 
anticipated modest increase in new options series that will result from 
the proposed changes to the $2.50 Strike Program.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)\10\ of the Act and the rules and regulations under 
the Act, in general, and furthers the objectives of Section 
6(b)(5),\11\ 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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 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

    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 \12\ and Rule 19b-
4(f)(6) thereunder.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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.
---------------------------------------------------------------------------

    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.\14\ 
Therefore, the Commission designates the proposal operative upon 
filing.\15\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 64157 (March 31, 
2011) (SR-Phlx-2011-15) (order approving expansion of $2.50 Strike 
Price Program).
    \15\ 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).
---------------------------------------------------------------------------

    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-2011-029 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-2011-029. 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-2011-029 and should be 
submitted on or before April 27, 2011.


[[Page 19171]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Cathy H. Ahn,
Deputy Secretary.
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2011-8123 Filed 4-5-11; 8:45 am]
BILLING CODE 8011-01-P


