
[Federal Register Volume 76, Number 188 (Wednesday, September 28, 2011)]
[Notices]
[Pages 60107-60108]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-24918]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65383; File No. SR-CBOE-2011-040]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule to Simplify the 
$1 Strike Price Interval Program

September 22, 2011.

I. Introduction

    On July 26, 2011, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change regarding opening index option 
months and series. The proposed rule change was published for comment 
in the Federal Register on August 9, 2011.\3\ The Commission received 
no comment letters on the proposal. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 65031 (August 4, 2011), 
76 FR 48935 (``Notice'').
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II. Description of the Proposal

    The proposal seeks to amend Interpretation and Policy .01 to Rule 
5.5 to simplify the $1 Strike Price Interval Program (the ``Program''). 
The Exchange established the Program in 2003, and has subsequently 
modified it on several occasions.\4\ The most recent expansion of the 
Program, in early 2011, increased the number of $1 strike price 
intervals permitted within the $1 to $50 range.\5\ This expansion, 
however, resulted in complex and lengthy rule text. In its filing, CBOE 
stated that the proposed changes to simplify the rule text of the 
Program will benefit market participants since the Program will be 
easier to understand and will maintain the expansions made to the 
Program in early 2011.
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    \4\ See Securities Exchange Act Release No. 47991 (June 5, 
2003), 68 FR 35243 (June 12, 2003) (SR-CBOE-2001-60); Release No. 
57049 (December 27, 2007), 73 FR 528 (January 3, 2008) (SR-CBOE-
2007-125); Release No. 59587 (March 17, 2009), 74 FR 12414 (March 
24, 2009) (SR-CBOE-2009-001); Release No. 62443 (July 2, 2010), 75 
FR 39608 (July 9, 2010) (SR-CBOE-2010-064).
    \5\ See Securities Exchange Act Release No. 63772 (January 25, 
2011), 76 FR 5644 (February 1, 2011) (SR-CBOE-2011-006).
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    To simply the rules of the Program and as a proactive attempt to 
mitigate any unintentional listing of improper strikes, CBOE proposed 
the following amendments:


[[Page 60108]]


     When the price of the underlying stock is equal to or 
less than $20, permit $1 strike price intervals with an exercise 
price up to 100% above and 100% below the price of the underlying 
stock.\6\
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    \6\ See proposed Rule 5.5.01(a)(2)(i).
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    [cir] However, the above restriction would not prohibit the 
listing of at least five strike prices above and below the price of 
the underlying stock per expiration month in an option class.\7\
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    \7\ Id.
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    [cir] For example, if the price of the underlying stock is $2, 
the Exchange would be permitted to list the following series: $1, 
$2, $3, $4, $5, $6 and $7.\8\
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    \8\ Id.
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     When the price of the underlying stock is greater than 
$20, permit $1 strike price intervals with an exercise price up to 
50% above and 50% below the price of the underlying security up to 
$50.\9\
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    \9\ See proposed Rule 5.5.01(a)(2)(ii).
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     For the purpose of adding strikes under the Program, 
the ``price of the underlying stock'' shall be measured in the same 
way as ``the price of the underlying security'' is as set forth in 
Rule 5.5A(b)(i).\10\
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    \10\ See proposed Rule 5.5.01(a)(2)(iii). Rule 5.5A(b)(i) 
provides, ``[t]he price of a security is measured by: (1) For intra-
day add-on series and next-day series additions, the daily high and 
low of all prices reported by all national securities exchanges; (2) 
for new expiration months, the daily high and low of all prices 
reported by all national securities exchanges on the day the 
Exchange determines it preliminary notification of new series; and 
(3) for option series to be added as a result of pre-market trading, 
the most recent share price reported by all national securities 
exchanges between 7:45 a.m. and 8:30 a.m. (Chicago time).''
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     Prohibit the listing of additional series in $1 strike 
price intervals if the underlying stock closes at or above $50 in 
its primary market and provide that additional series in $1 strike 
price intervals may not be added until the underlying stock closes 
again below $50.\11\
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    \11\ See proposed Rule 5.5.01(a)(2)(iv). The Exchange believes 
that it is important to codify this additional series criterion 
because there have been conflicting interpretations among the 
exchanges that have adopted similar programs. The $50 price 
criterion for additional series was intended when the Program was 
originally established (as a pilot) in 2003. See Securities Exchange 
Act Release No. 47991 (June 5, 2003), 68 FR 35243 (June 12, 2003) 
(SR-CBOE-2001-60) (``CBOE may list an additional expiration month 
provide that the underlying stock closes below $20 on its primary 
market on expiration Friday. If the underlying stock closes at or 
above $20 on expiration Friday, CBOE will not list an additional 
month for a $1 strike series until the stock again closes below 
$20.'')

    The early 2011 expansion of the Program permitted for some limited 
listing of LEAPS in $1 strike price intervals for classes that 
participate in the Program. The Exchange is proposing to simplify the 
language and provide clearer examples. These changes are set forth in 
proposed Rule 5.5.01(b)(2)(v).
    For stocks in the Program, the Proposal permits the Exchange to 
list one $1 strike price interval between each standard $5 strike 
interval, with the $1 strike price interval being $2 above the standard 
strike for each interval above the price of the underlying stock, and 
$2 below the standard strike for each interval below the price of the 
underlying stock. The proposed rule text defines these strikes as ``$2 
wings.'' For example, if the price of the underlying stock is $24.50, 
the Exchange may list the following standard strikes in $5 intervals: 
$15, $20, $25, $30 and $35. Between these standard $5 strikes, the 
Exchange may list the following $2 wings: $18, $27 and $32.\12\
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    \12\ The Exchange notes that a $2 wing is not permitted between 
the standard $20 and $25 strikes in the above example. This is 
because the $2 wings are added based on reference to the price of 
the underlying and as being between the standard strikes above and 
below the price of the underlying stock. Since the price of the 
underlying stock ($24.50) straddles the standard strikes of $20 and 
$25, this provision does not permit a $2 wing to be listed between 
these standard strikes. Instead, a separate provision, discussed in 
the next paragraph, permits listing of a strike price between the 
standard strikes that bracket the current underlying price.
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    In addition, the proposal permits the Exchange to list the $1 
strike price interval that is $2 above the standard strike just below 
the underlying price at the time of listing. In the above example, 
since the standard strike just below the underlying price ($24.50) is 
$20, the Exchange may list a $22 strike.
    The proposal also contains certain non-substantive amendments to 
rule text.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, 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.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change seeks to simplify the Program, and thereby 
to reduce the possibility of confusion among investors and market 
participants. At the same time, the Commission notes that the changes 
proposed by CBOE would allow a relatively modest increase to the total 
number of series that may be listed under the $1 Strike Interval 
Program, and would not alter the range for which $1 interval strikes 
are permitted to be listed. The Commission also notes that CBOE has 
represented that it has the necessary systems capacity to support the 
increase in new options series that will result from the proposed 
streamlining changes to the Program.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-CBOE-2011-040) be, and it 
hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-24918 Filed 9-27-11; 8:45 am]
BILLING CODE 8011-01-P


