Federal Register / Vol. 62, No. 23 / Tuesday, February 4, 1997 / Notices 5265

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3A 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.

4The 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.

[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.

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.

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 Americanstyle exercise. The Exchange expects

Packaged Butterfly Spreads to be

supported enthusiastically by marketmakers 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 marketmaker’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-themoney 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.
5266 Federal Register / Vol. 62, No. 23 / Tuesday, February 4, 1997 / Notices

5See Memorandum from Joe Corrigan, OPRA, to

Eileen Smith, CBOE, dated November 21, 1996.

6 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3A 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.

Miscellaneous. CBOE will use the

same surveillance methods it currently

employs with respect to their broadbased 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

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–2630 Filed 2–3–97; 8:45 am]

BILLING CODE 8010–01–M

[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.

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 Europeanstyle 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.

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 transactionrelated expenses because the investor