
[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79748-79750]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32749]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65986; File No. SR-Phlx-2011-175]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Regarding Strike Price Intervals for SLV 
and USO Options

 December 16, 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 December 7, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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.
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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

    The Exchange is filing with the Commission a proposal to amend 
Commentary .05 of Rule 1012 (Series of Options Open for Trading) to 
allow trading of options on iShares[supreg] Silver Trust \3\ and United 
States Oil Fund at $0.50 strike price intervals where the strike price 
is less than $75.
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    \3\ See email from Jurij Trypupenko, Associate General Counsel, 
the NASDAQ OMX Group, Inc., to Drew J. Zimmerman, confirming that 
``iShares[supreg]'' is a registered trademark of BlackRock 
Institutional Trust Company, N.A.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, at the principal office of the Exchange, at the Commission's 
Web site at www.sec.gov, 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 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this filing is to amend Commentary .05 of Rule 1012 
to allow trading of options on iShares[supreg] Silver Trust (``SLV'' or 
``SLV Trust'') and United States Oil Fund (``USO'' or ``USO Fund'') at 
$0.50 strike price intervals where the strike price is less than $75.
The Underlying ETFs
    Two popular exchange traded funds (``ETFs''), which are known on 
the Exchange as Exchange-Traded Fund Shares, underlie SLV and USO 
options.\4\ SLV and USO options are currently traded on several 
exchanges.\5\
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    \4\ As of July 31, 2011, the average daily volume (``ADV'') over 
the previous three calendar months was 60,087,539 for SLV and 
13,881,380 for USO.
    \5\ These exchanges include, in addition to Phlx: NYSEAmex 
(``Amex''), NYSEArca (``Arca''), BATS Global Markets (``BATS''), 
Boston Options Exchange (``BOX''), Chicago Board Options Exchange 
(``CBOE''), C2 Options Exchange (``C2''), International Securities 
Exchange (``ISE''), and NASDAQ Options Exchange (``NOM'').
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    The iShares[supreg] Silver Trust is a grantor trust that is 
designed to provide a vehicle for investors to own interests in silver. 
The purpose of the SLV Trust is to own silver transferred to the trust 
in exchange for shares that are issued by the trust. Each of such 
shares represents a fractional undivided beneficial interest in the net 
assets of the SLV Trust. The objective of the SLV Trust is

[[Page 79749]]

for the value of the iShares[supreg] to reflect, at any given time, the 
price of silver owned by the trust at that time.
    The United States Oil Fund is a domestic exchange traded security 
designed to track the movements of light, sweet crude oil that is known 
as West Texas Intermediate. The investment objective of the USO Fund is 
for the changes in percentage terms of its units' net asset value to 
reflect the changes in percentage terms of the spot price of light, 
sweet crude oil delivered to Cushing, Oklahoma, as measured by the 
changes in the price of the futures contract for light, sweet crude oil 
traded on the New York Mercantile Exchange (the ``NYMEX''), less USO's 
expenses.
    The ETFs underlying SLV and USO options, which are listed on NYSE 
Arca, are not affected or changed by this filing.
The Proposal
    Commentary .05(a)(iv) of Rule 1012 currently states that the 
interval of strike prices of series of options on Exchange-Traded Fund 
Shares will be $1 or greater where the strike price is $200 or less and 
$5 or greater where the strike price is more than $200. This is similar 
to the applicable ETF option interval standards of other options 
markets.\6\
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    \6\ See, for example, CBOE Rule 5.5 Interpretation and Policy 
.08; and NOM Chapter IV Section 6, Supplementary Material .01 to 
Section 6.
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    The Commission has recently approved a CBOE proposal to allow $0.50 
strike price intervals for options on certain ETFs and individual 
equity securities on which CBOE would calculate volatility (known as 
``volatility options'').\7\ The Exchange is, in this filing, proposing 
$0.50 strike price intervals for options on ETFs similarly to what CBOE 
proposed in respect of volatility options. The Exchange notes that its 
$0.50 strike price interval proposal is, however, limited in several 
respects. First, the proposed $0.50 intervals are limited to only one 
type of underlying instrument, namely Exchange-Traded Fund Shares. 
Second, the $0.50 intervals are proposed for two option products, 
namely iShares[supreg] Silver Trust and United States Oil Fund. And 
third, the intervals are limited to strike prices that are less than 
$75.
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    \7\ See Securities Exchange Act Release No. 64189 (April 5, 
2011), 76 FR 20066 (April 11, 2011)(SR-CBOE-008)(order granting 
approval of $0.50 and $1 strike price intervals for certain 
volatility options where the strike prices are less than $75 and 
between $75 and $150, respectively). Other Exchanges have submitted 
similar immediately effective proposals. See Securities Exchange Act 
Release Nos. 64325 (April 22, 2011), 76 FR 23632 (April 27, 2011) 
(SR-NYSEAmex-2011-26); 64324 (April 22, 2011), 76 FR 23849 (April 
28, 2011) (SR-NYSEArca-2011-19); 64359 (April 28, 2011), 76 FR 25390 
(May 4, 2011) (SR-ISE-2011-27); and 64589 (June 2, 2011), 76 FR 
33387 (June 8, 2011)(SR-Phlx-2011-74).
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    Other than options in $0.50 strike price intervals approved for 
CBOE as noted, options on ETFs or Exchange Trades Fund Shares trade at 
$1 intervals where the strike price is below $200. As demonstrated in 
this filing, however, this $1 strike price interval is no longer always 
appropriate, and in fact may be counter-productive and more costly, for 
ETF option traders and investors that are trying to achieve optimum 
trading, hedging, and investing objectives.
    Traders have expressed their belief that the strike price intervals 
for SLV and USO options are too coarse, and have asked for the ability 
to trade and hedge such options in smaller intervals. The Exchange 
believes that reducing these strike price intervals would make 
excellent economic sense, would allow better tailored investing and 
hedging opportunities, and would potentially enable traders and 
investors to save money.
    The number of low-priced strike interval options have [sic] 
increased significantly over the last decade, such that now there are 
approximately 935 equity options and 225 ETF options listed at $1 
strike price intervals.\8\
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    \8\ Figures were based on July 2011 data using symbols with a 
2011 expiration date.
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    There are also, in addition to the newly enabled CBOE $0.50 strike 
price options, approximately 19 options listed at $0.50 strike price 
intervals pursuant to the $0.50 Strike Program.\9\ Clearly, however, 
this is no longer sufficient in the current volatile and economically 
challenging environment. Traders and investors are requesting more low-
priced interval ETF options so that they may better tailor investing 
and hedging strategies and opportunities.\10\
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    \9\ The noted $0.50 intervals were established per the $0.50 
Program found in Commentary .05(a)(ii) of Rule 1012. The $0.50 
Program has inherent price limitations that make it unsuitable for 
SLV and USO options.
    \10\ The Exchange is not aware of any material market 
surveillance issues arising because of the $0.50 or $1.00 the strike 
price intervals.
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    By way of example, if an investor wants to gain exposure to the 
silver market or hedge his position, he may invest in options on the 
iShares[reg] Silver Trust (SLV). Today an investor must choose a strike 
price that might lack the precision he is looking for in order to gain 
or reduce exposure to the silver market. Thus, an investor executing a 
covered call strategy may be looking to sell calls on SLV. Assume the 
investor's SLV cost basis is $38.35. The nearest out-of-the-money 
strike call is the 39.00 strike, which is 1.69% out of the money. If 
the 38.50 strike were available, however, the investor could sell calls 
in a strike price only .39% out-of-the-money, thus offering 1.29% 
additional risk protection. To an investor writing covered calls on an 
equity position, this extra protection could be significant on an 
annual basis.
    With United States Oil Fund (USO), a similar lack of precision 
exists at the current strike prices. For an investor looking to 
purchase out-of-the-money put protection against a USO purchase of 
$31.65, the investor must choose the 31.00 strike, which is 2.05% out-
of-the-money. If the 31.50 strike were available, the investor could 
avail himself of a superior strike price that is only .47% out of the 
money, thus offering 1.58% additional protection. The smaller strike 
price offers an increased amount of downside protection to the investor 
at a more precisely factored cost for the hedging opportunity.
    Moreover, an investor may want to execute an investment or hedging 
strategy whereby the investor would close one position and open another 
through use of a complex order. Implementing $0.50 strike intervals 
would, again, offer more precision and an opportunity to improve 
returns and/or risk protection. Thus, using the previous SLV example, 
the investor who purchased SLV at $38.35 and sold the $38.50 call might 
later wish to purchase a call to close the original position and roll 
into a new position as the stock moves away from the original strike 
price. By offering $0.50 strike prices, the investor may be able to 
again avail himself of a better return or hedging opportunity.
    The Exchange also believes that with the increase in inter-market 
trading and hedging,\11\ the ability to offer potentially similarly-
situated products at more similar strike intervals gains importance. 
Thus, options on futures underlying USO and SLV are traded at $0.50 and 
lower strike price intervals. Options on USO futures listed for trading 
on the NYMEX have $0.50 strike price intervals.\12\ And options on 
silver futures listed on NYMEX have strike

[[Page 79750]]

price intervals as low as $0.05.\13\ The Exchange is not, in this 
filing, proposing to go to sub-$0.50 strike price intervals but is 
proposing reasonable, requested, and needed $0.50 intervals only where 
the strike price of the underlying is less than $75.
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    \11\ Particularly between options markets and futures markets 
that also trade options on futures.
    \12\ Per the NYMEX Web site, http://www.cmegroup.com/product-codes-listing/nymex-market.html, options on crude oil futures are 
listed nine years forward whereby consecutive months are listed for 
the current year and the next five years, and in addition, the June 
and December contract months are listed beyond the sixth year. 
Additional months will be added on an annual basis after the 
December contract expires, so that an additional June and December 
contract would be added nine years forward, and the consecutive 
months in the sixth calendar year will be filled in.
    \13\ Per the NYMEX Web site, http://www.cmegroup.com/product-codes-listing/nymex-market.html, options on silver futures are 
listed for the first three months at strike price intervals of $.05. 
An additional ten strike prices will be listed at $.25 increments 
above and below the highest and lowest five-cent increment, 
respectively, beginning with the strike price evenly divisible by 
$.25. For all other trading months, strike prices are at an interval 
of $.05, $.10, and $.25 per specified parameters.
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    By establishing $0.50 strike intervals for SLV and USO options, 
investors would have greater flexibility for trading and hedging the 
underlying ETFs or hedging market exposure \14\ through establishing 
appropriate options positions tailored to meet their investment, 
trading and risk profiles.
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    \14\ A trader or investor may, for example, use a commodity-
oriented ETF such as the SLV Trust or USO Fund to counter-balance 
(hedge) an equity or ETF position that tends to move inversely to 
the price movement of SLV or USO.
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    Finally, in terms of housekeeping the Exchange is making non-
substantive changes to Commentary .06 of Rule 1009 to improve its 
readability. The Exchange proposes language indicating that Exchange 
Trade Fund Shares may represent interests in several listed optionable 
trusts, in lieu of current language that shares may be issued by such 
trusts.
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. This would be achieved by establishing $0.50 strike intervals 
for SLV and USO options so that traders, market participants, and 
investors in general may have greater flexibility for trading and 
hedging the underlying ETFs or hedging market exposure through 
establishing appropriate options positions tailored to meet their 
investment, trading and risk profiles.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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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 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2011-175 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-2011-175. This file 
number should be included on the subject line if email 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-2011-175 and should be 
submitted on or before January 12, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority. \17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32749 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P


