[Federal Register Volume 75, Number 221 (Wednesday, November 17, 2010)]
[Notices]
[Pages 70337-70339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28899]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63304; File No. SR-ISE-2010-108]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Expand the $0.50 Strike Program
November 10, 2010.
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 November 10, 2010, the International Securities Exchange, LLC
(``ISE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``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
The Exchange proposes to amend its rules to: (i) Expand the $0.50
Strike Program for strike prices below $1.00; (ii) extend the $0.50
Strike Program to strike prices that are $5.50 or less; (iii) extend
the prices of the underlying security to at or below $5.00; and (iv)
extend the number of options classes overlying 20 individual stocks.
The text of the proposed rule change is available on the Exchange's Web
site http://www.ise.com, at the principal office of the Exchange, on
the Commission's Web site at http://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 self-regulatory organization 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 proposed rule change is to modify the
Exchange's rules to expand the $0.50 Strike Program in order to provide
investors with opportunities and strategies to minimize losses
associated with owning a stock declining in price.
The Exchange is proposing to establish strike price intervals of
$0.50, beginning at $0.50 for certain options classes where the strike
price is $5.50 or less and whose underlying security closed at or below
$5.00 in its primary market on the previous trading day and which have
national average daily volume that equals or exceeds 1000 contracts per
day as determined by The Options Clearing Corporation (``OCC'') during
the preceding three calendar months. The Exchange also proposes to
limit the listing of $0.50 strike prices to options classes overlying
no more than 20 individual stocks as specifically designated by the
Exchange.
Currently, Supplementary Material .05 to ISE Rule 504 permits
strike price intervals of $0.50 or greater beginning at $1.00 where the
strike price is $3.50 or less, but only for option classes whose
underlying security closed at or below $3.00 in its primary market on
the previous trading day and which have national average daily volume
that equals or exceeds 1000 contracts per day as determined by OCC
during the preceding three calendar months. Further, the listing of
$0.50 strike prices is limited to options classes overlying no more
than 5 individual stocks as specifically designated by the Exchange.
The Exchange is currently restricted from listing series with $1
intervals within $0.50 of an existing strike price in the same series,
except that strike prices of $2, $3, and $4 shall be permitted within
$0.50 of an existing
[[Page 70338]]
strike price for classes also selected to participate in the $0.50
Strike Program.\3\
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\3\ See Supplementary Material .01 to ISE Rule 504 referring to
the $1 Strike Program.
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The number of $0.50 strike options traded on the Exchange has
continued to increase since the inception of the $0.50 Strike Program.
There are now approximately 19 of the $0.50 strike price option classes
listed, and traded, across all options exchanges including ISE; 3 of
which are classes chosen by ISE for the $0.50 Strike Program. The
current proposal would expand $0.50 strike offerings to market
participants, such as traders and retail investors, and thereby enhance
their ability to tailor investing and hedging strategies and
opportunities in a volatile market place.
By way of example, if an investor wants to invest in 5,000 shares
of Sirius Satellite (``SIRI'') at $0.9678,\4\ the only choice the
investor would have today would be to buy out-of-the-money calls, at
the $1.00 strike, or to invest in the underlying stock with a total
outlay of $0.96 per share or $4,800. However, if a $0.50 strike series
were available, an investor may be able to invest in 5,000 shares by
purchasing an exercisable in-the-money $0.50 strike call option. It is
reasonable to assume that with SIRI trading at $0.96, the $0.50 strike
call option would trade at an estimated price of $0.46 to $0.48 under
normal circumstances. This would allow the investor to manage 5,000
shares with the same upside potential return for a cost of only $2,350
(assuming $.47 as a call price).
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\4\ SIRI was trading at $0.9678 on July 13, 2010.
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Similarly, if an investor wanted to spend $4,800 for 5,000 shares
of SIRI, a $0.50 put option that would trade for $0.01 to $0.05 would
provide protection against a declining stock price in the event that
SIRI dropped below $0.50 per share. In a down market, where high volume
widely held shares drop below $1.00, investors deserve the opportunity
to hedge downside risk in the same manner as investors have with stocks
greater than $1.00.
Increasing the threshold from $3.00 to $5.00 and expanding the
number of $0.50 strikes available for stocks under $5.00 further aids
investors by offering opportunities to manage risk and execute a
variety of option strategies to improve returns. For example, today an
investor can enhance their yield by selling an out-of-the-money call.
Using an example of an investor who wants to hedge Citigroup (``C'')
which is trading at $4.24,\5\ that investor would be able to choose the
$4.50 strike which is 6% out-of-the-money or they would be able to
choose the $5.00 strike which is 17.92% out-of-the-money, under this
proposal. Today, this investor only has the latter choice. Beyond that,
this investor today may choose the $6.00 strike which is 41% out-of-
the-money and offers significantly less premium. Pursuant to this
proposal if this investor had a choice to hedge with a $5.50 strike
option, the investor would have the opportunity to sell the option at
only 29% out-of-the-money and would improve their return by gaining
more premium, while also benefitting from 29% of upside return in the
underlying equity.
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\5\ C was trading at $4.24 on July 14, 2010.
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By increasing the number of securities from 5 individual stocks to
20 individual stocks would allow the Exchange to offer investors
additional opportunities to use the $0.50 Strike Program. The Exchange
notes that $0.50 strikes have had no impact on capacity. Further, the
Exchange has observed the popularity of $0.50 strikes.
The open interest in the $2.50 August strike series for Synovus
Financial Corp. (``SNV''), which closed at $2.71 on July 13, 2010, was
12,743 options; whereas open interest in the $2 and $3 August strike
series was a combined 318 options. The open interest in the August
$1.50 strike series for Ambac Financial Group, Inc. (``ABK''), which
closed at $0.7490 on July 13, 2010, was 15,879 options compared to
8,174 options for the $2 strike series. The August $2.50 strike series
had open interest of 22,280 options, also more than the traditional $2
strike series.
By expanding the $0.50 Strike Program investors would be able to
better enhance returns and manage risk by providing investors with
significantly greater flexibility in the trading of equity options that
overlie lower price stocks by allowing investors to establish equity
options positions that are better tailored to meet their investment,
trading and risk.
The Exchange also proposes making a corresponding amendment to
Supplementary Material .01 to ISE Rule 504 to add $5 and $6 to $1
Strike Program language that addresses listing series with $1 intervals
within $0.50 of an existing strike price in the same series. Currently,
and to account for the overlap with the $0.50 Strike Program, the
following series are excluded from this prohibition: Strike prices of
$2, $3, and $4. The Exchange proposes to add $5 and $6 to that list to
account for the proposal to expand the $0.50 Strike Program to a strike
price of $5.50.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 \6\ (the ``Act'') in
general, and furthers the objectives of Section 6(b)(5) of the Act \7\
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 amending the current $0.50 Strike Program would result in a
continuing benefit to investors by giving them more flexibility to
closely tailor their investment decisions in a greater number of
securities. With the increase in active, low-price securities, the
Exchange believes that amending the $0.50 Strike Program to allow a
$0.50 strike interval below $1 for strike prices of $5.50 or less is
necessary to provide investors with additional opportunity to minimize
and manage risk.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is 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
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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 \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 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.
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[[Page 70339]]
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.\10\
Therefore, the Commission designates the proposal operative upon
filing.\11\
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\10\ See Securities Exchange Act Release No. 63132 (October 19,
2010) (SR-Phlx-2010-118) (order approving expansion of $0.50 Strike
Price Program).
\11\ 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).
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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 [email protected]. Please include
File Number SR-ISE-2010-108 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-ISE-2010-108. 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-ISE-2010-108 and should be
submitted on or before December 8, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon.
Deputy Secretary.
[FR Doc. 2010-28899 Filed 11-16-10; 8:45 am]
BILLING CODE 8011-01-P