[Federal Register Volume 62, Number 23 (Tuesday, February 4, 1997)]
[Notices]
[Pages 5266-5267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2631]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38214; File No. SR-CBOE-96-76]


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

January 28, 1997.
    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 CBOE proposes to list for trading Vertical Spreads based on the 
S&P 100 and S&P 500 indexes. A Vertical Spread is a packaged European-
style option which replicates the behavior and payout of a vertical 
spread composed of standard index option contracts. A Vertical Spread 
may have a multiplier of 100 (as with standard index option contracts 
overlying the S&P 100 and the S&P 500) or a multiplier of 500. The text 
of the proposed rule change is available at the Office of the 
Secretary, CBOE 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 
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

    The purpose of the proposed rule change is to amend Exchange rules 
to provide for the listing and trading of Vertical Spreads based upon 
the S&P 100 index and the S&P 500 index. A Vertical Spread is a 
packaged European-style option which replicates the behavior and payout 
of a vertical spread \3\ composed of standard index option contracts. 
Vertical Spreads may have a multiplier of 100 (as with standard index 
options overlying the S&P 100 and the S&P 500) or a multiplier of 500.
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    \3\ A vertical spread is the combination of one long and one 
short options having the same expiration. A call vertical spread 
will have a lower strike price on the long option and a put spread 
will have a higher strike price on the long option. For example, a 
call vertical spread might consist of one long December (expiration 
month) 700 (strike price) call option and one short December 690 
call option.
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    The Exchange believes Vertical Spreads will provide advantages to 
the investing public that are not provided for by standard index 
options. First, the Exchange believes these Vertical Spreads offer 
investors a relatively low risk security where the risk reduction 
results because Vertical Spreads, by their nature, have a maximum gain 
and loss that can be realized regardless of the movement of the index 
level. In addition, with Vertical Spreads there is no early exercise 
risk. These options are the equivalent of standard vertical spreads 
(i.e., the combination of one long and one short options position with 
the same expiration) traded as a single security. Second, the 
``packaging'' of a strategy of two option positions into one option 
product reduces transaction-related expenses because the investor

[[Page 5267]]

will only have to enter into one transaction. In the case of Vertical 
Spreads with a multiplier of 500, the transaction-related expenses 
would be substantially reduced from a comparable trade involving 
standard index options. Third, in the case of Vertical 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 
Vertical Spreads to be supported enthusiastically by market-makers 
because spread trading is a familiar strategy to professional traders 
and the Vertical Spreads can be easily incorporated into the overall 
risk profile of the market-maker's trading strategy in standard index 
options.
    An addition will be made to Rule 24.1 to describe the new product 
as well as the term ``vertical spread interval.''
    Position and Exercise Limits. The Exchange is proposing position 
limits for Vertical Spreads overlying the S&P 100 of 100,000 contracts 
where the index multiplier is 100. The Exchange also is proposing 
position limits for Vertical Spreads overlying the S&P 500 Index of 
100,000 contracts where the index multiplier is 100. The Exchange 
believes these position limits are consistent with the position limits 
that have been established for standard index options on the S&P 100 
and 500 indexes. To the extent that the Exchange lists and a member 
holds Vertical Spread positions with different multipliers (i.e., 100 
and 500) yet overlying the same index, these positions would be 
aggregated in determining compliance with the position limits. Each 
Vertical Spread with a 500 multiplier would count as 5 Vertical Spread 
contracts for the purpose of determining compliance with the position 
limits. The exercise limits for Vertical Spreads will be equal to the 
positions limits set forth above in accordance with the terms of 
current Rule 24.5.
    Margin. With respect to margin requirements, risk exposure is 
limited in Vertical Spreads, and therefore, the maximum margin 
requirements should not exceed the maximum exposure amount which, for 
each Vertical Spread option contract equals the vertical spread 
interval times the index multiplier. The proposed amendments state that 
the maximum margin required for a put or call Vertical Spread option 
contract carried in a short position shall not exceed this maximum 
exposure amount. In addition, the amendment provides that for each put 
or call Vertical Spread option contract carried in a short position in 
a cash account, the customer must deposit cash equal to the 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 Vertical Spread would be the 
lesser of (1) the difference in the aggregate exercise prices or (2) 
the cap interval or the vertical spread interval as appropriate.
    Listing of Series. The Exchange expects to list both put and call 
contracts having various spread intervals. Initially, the Exchange 
intends to list an at-the-money strike and various strikes around the 
at-the-money level in the first two near-term months. New strikes will 
be added when the underlying indexes trade through the highest or 
lowest strike available.
    Settlement. The expiration date for Vertical 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 will be equal to 
the difference between the OEX or SPX settlement value, as appropriate, 
and the strike price of the Vertical Spread contract; or the amount of 
the spread interval, whichever is less, multiplied by the multiplier, 
i.e., either $100 or $500. Vertical Spreads will have a European-style 
of exercise.
    Miscellaneous. CBOE will use the same surveillance methods it 
currently employs with respect to other broad-based index options.
    CBOE has also been informed that the Options Price Reporting 
Authority (``OPRA'') has the capacity to support the new series 
associated with the listing of Vertical Spreads.
    By adopting rules that will provide for the trading of index 
options that will provide investors with certain advantages over 
current products in the way of reduced transaction costs and risk 
reduction, CBOE believes the proposed rule change is consistent with 
and furthers the objectives of Section 6(b)(5) of the Act 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

    Interested 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-96-76 and should be 
submitted by February 25, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2631 Filed 2-3-97; 8:45 am]
BILLING CODE 8010-01-M