[Federal Register Volume 62, Number 23 (Tuesday, February 4, 1997)]
[Notices]
[Pages 5265-5266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2630]



[[Page 5265]]

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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38213; File No. SR-CBOE-96-75]
January 28, 1997.


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Relating to 
the Listing and Trading of Packaged Butterfly Spreads.

    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 16, 1996, the (``CBOE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``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 proposes to list for trading Packaged Butterfly 
Spreads based upon a broad-based index or indexes. A Packaged Butterfly 
Spread is a European-style option contract that replicates the behavior 
and payout of a butterfly spread composed of standard index option 
contracts. Initially, the proposed underlying indexes for the Packaged 
Butterfly Spreads are the S&P 100 and the S&P 500. The text of the 
proposed rule change is available at the Office of the Secretary, the 
Exchange, and at the Commission.

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. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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

    The Exchange proposes to list for trading Packaged Butterfly 
Spreads based upon the S&P 100 index and the S&P 500 index. A Packaged 
Butterfly Spread is a packaged European-style option that replicates 
the behavior and payout of a butterfly spread \3\ composed of standard 
index option contracts. A butterfly spread is a neutral strategy, i.e., 
it is employed by one who thinks the underlying stock or index will not 
experience much of a net rise or decline by expiration. The Exchange 
proposes that the Packaged Butterfly Spreads on the S&P 100 and 500 
indexes will have a multiplier of 100.\4\ Because Packaged Spreads 
composed of puts are identical to those composed of calls the Exchange 
will not list both puts and calls; there will be only one option for 
each strike price and butterfly interval.
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    \3\ A butterfly spread is a combination of four option positions 
and involves using three strike prices. For example, using only 
calls (a butterfly spread could also consist of a combination of 
puts and calls), a butterfly spread would consist of buying one call 
at the lowest strike price, selling two calls at the middle strike 
price and buying one call at the highest strike price. A butterfly 
spread might consist of one long December (expiration month) 670 
(strike price) call option, two short December 700 call options, and 
one long December 730 call option.
    \4\ The Exchange in its original proposal erroneously proposed 
Packaged Butterfly Spreads with a multiplier of 500 in addition to 
the 100 multiplier. The Exchange intends to correct this error in a 
subsequent amendment. Telephone Conversation between Eileen Smith, 
CBOE and John Ayanian, Division of Market Regulation, Commission, on 
January 24, 1997.
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    The Exchange believes Packaged Butterfly Spreads will provide 
advantages to the investing public that are not provided for by 
standard index options. First, the Exchange believes Packaged Butterfly 
Spreads offer investors, a relatively low risk security which results 
because Packaged Butterfly Spreads, by their nature, have a maximum 
gain and loss that can be realized regardless of the movement in the 
index level. Packaged Butterfly Spreads allow investors to profit from 
trendless markets with limited risk. Second, the ``packaging'' of a 
strategy of four option positions into one option product reduces 
transaction-related expenses because the investor will only have to 
enter into one transaction. Third, in the case of Packaged Butterfly 
Spreads overlying the S&P 100, the investor will have the opportunity 
to invest in an option product that has European-style exercise. 
Standard S&P 100 options (``OEX'') have American-style exercise. The 
Exchange expects Packaged Butterfly Spreads to be supported 
enthusiastically by market-makers because butterfly spread trading is a 
familiar strategy to professional traders and the Packaged Butterfly 
Spreads can be easily incorporated into the overall risk profile of the 
market-maker's trading strategy in standard index options.
    The Exchange proposes to amend Rule 24.1 to describe the new 
product as well as the term ``butterfly spread interval''.
    Position and Exercise Limits. The Exchange is proposing position 
limits for Packaged Butterfly Spreads overlying the S&P 100 of 100,000 
contracts. Likewise, the Exchange is proposing position limits for 
Packaged Butterfly Spreads overlying the S&P 500 of 100,000 contracts. 
These position limits are consistent with the position limits that have 
been established for standard index options on the S&P 500 index. The 
exercise limits for Packaged Butterfly Spreads will be equal to the 
position limits set forth above in accordance with the terms of CBOE 
Rule 24.5.
    Margin. With respect to margin, risk exposure is limited in 
Packaged Butterfly Spreads, and therefore, the maximum margin 
requirements should not exceed the maximum exposure amount which, for 
each Packaged Butterfly Spread option contract equals the spread 
interval times the index multiplier. The proposed amendments state that 
the maximum margin required for a Packaged Butterfly Spread option 
contract carried in a short position shall not exceed this maximum 
exposure amount. The rules will also provide that the required margin 
for a spread when the exercise price of the long call index option is 
greater than the exercise price of the short call index option where at 
least one leg of the spread is a CAPS or Packaged Butterfly Spread 
would be the lesser of (1) the difference in the aggregate exercise 
prices or (2) the cap interval or the butterfly spread interval as 
appropriate.
    Listing of Series. The Exchange expects to list contracts having 
spread intervals of 30 points or some other appropriate value. 
Initially, the Exchange intends to list an at-the-money and various 
strikes around the at-the-money in the first two near-term months. New 
strikes will be added when the underlying trades through the highest or 
lowest strike available.
    Settlement. The expiration date for Packaged Butterfly Spreads will 
be the Saturday immediately following the third Friday of the 
expiration month. Exercise will result in the delivery of cash on the 
business day following expiration. The exercise settlement amount is 
equal to the greater of (1) butterfly spread interval minus the 
difference between the index settlement value and the midpoint of the 
butterfly multiplied by the multiplier ($100), and (2) $0. Packaged 
Butterfly Spreads will have a European-style of exercise.

[[Page 5266]]

    Miscellaneous. CBOE will use the same surveillance methods it 
currently employs with respect to their broad-based index options.
    CBOE has also been informed that the Options Price Reporting 
Authority recently added another outgoing high speed line from OPRA 
processor and thus, has the capacity to support the new series 
associated the listing of Packaged Butterfly Spreads.\5\
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    \5\ See Memorandum from Joe Corrigan, OPRA, to Eileen Smith, 
CBOE, dated November 21, 1996.
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    The Exchange believes that the proposal will provide investors with 
certain advantages over current products in the way of reduced 
transaction costs and risk reduction. The Exchange believes, therefore, 
that the proposal is consistent with Section 6(b) of the Act in general 
and furthers the objectives of Section 6(b)(5) in particular in that it 
is designed to perfect the mechanisms of a free and open market and to 
protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will impose no 
burden on competition.

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 35 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 such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interestd persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street NW., 
Washington, DC 20549. Copies of such filing will also be available for 
inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CBOE-96-75 and should be 
submitted by February 25, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2630 Filed 2-3-97; 8:45 am]
BILLING CODE 8010-01-M