Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing of a Proposed Rule Change To Amend Exchange Rule 518, Complex Orders, To Adopt New Interpretation and Policy .07, 43212-43216 [2019-17846]
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Federal Register / Vol. 84, No. 161 / Tuesday, August 20, 2019 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–17862 Filed 8–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86682; File No. SR–MIAX–
2019–37]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing of a Proposed
Rule Change To Amend Exchange
Rule 518, Complex Orders, To Adopt
New Interpretation and Policy .07
August 14, 2019.
Pursuant to the provisions of 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 August 9, 2019, Miami International
Securities Exchange, LLC (‘‘MIAX
Options’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) a
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend Exchange Rule 518, Complex
Orders, to adopt new Interpretation and
Policy .07.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/ at MIAX Options’ principal
office, and at the Commission’s Public
Reference Room.
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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
23 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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 Exchange proposes to amend
Exchange Rule 518, Complex Orders, to
adopt new Interpretation and Policy .07,
SPIKES Combo Orders, to further
facilitate delta neutral transactions for
investors that use complex orders to
trade SPIKES options.
Complex Orders on the Exchange
Under the Exchange’s current rule a
‘‘complex order’’ is any order involving
the concurrent purchase and/or sale of
two or more different options in the
same underlying security (the ‘‘legs’’ or
‘‘components’’ of the complex order),
for the same account, in a ratio that is
equal to or greater than one-to-three
(.333) and less than or equal to three-toone (3.00) and for the purposes of
executing a particular investment
strategy.3 This allows the Exchange to
place the complex strategy 4 on the
Exchange’s Strategy Book.5 All
strategies placed on the Exchange’s
Strategy Book conform to this allowable
ratio (‘‘conforming strategy’’).6 The ratio
between the size of the smallest sized
option component and the largest sized
option component must be equal to or
greater than one-to-three (1:3) or less
than or equal to three-to-one (3:1). (e.g.,
Buy 30 XYZ May 18 Calls, Sell 10 XYZ
April 16 Calls (30:10 or 3:1))
A complex order can also be a ‘‘stockoption order.’’ A stock-option order is
an order to buy or sell a stated number
of units of an underlying security (stock
or Exchange Traded Fund Share
(‘‘ETF’’)) or a security convertible into
the underlying stock (‘‘convertible
security’’) coupled with the purchase or
sale of options contract(s) on the
opposite side of the market representing
either (i) the same number of units of
the underlying security or convertible
3 See
Exchange Rule 518(a)(5).
term ‘‘complex strategy’’ means a particular
combination of components and their ratios to one
another. New Complex strategies can be created as
the result of the receipt of a complex order or by
the Exchange for a complex strategy that is not
currently in the System. The Exchange may limit
the number of new complex strategies that may be
in the System at a particular time and will
communicate this limitation to Members via
Regulatory Circular. See Exchange Rule 518(a)(6).
5 The ‘‘Strategy Book’’ is the Exchange’s
electronic book or complex orders and complex
quotes. See Exchange Rule 518(a)(17).
6 The Exchange notes that orders representing
non-conforming strategies are rejected.
4 The
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security, or (ii) the number of units of
the underlying stock necessary to create
a delta neutral position, but in no case
in a ratio greater than eight-to-one
(8.00), where the ratio represents the
total number of units of the underlying
security or convertible security (i.e.,
contracts) in the option leg to the total
number of units of the underlying
security (i.e., 100 shares) or convertible
security in the stock leg.7
An option’s price can be influenced
by a number of different factors. Some
of these are known as the ‘‘Greeks’’
because they are commonly abbreviated
with Greek letters; Delta, Gamma, Theta,
and Vega.
Delta
The Delta (D) is a measure of the
change in an option’s price (premium of
an option) resulting from a change in
the underlying security. The value of
Delta ranges from ¥100 to 0 for puts
and 0 to 100 for calls (multiplied by 100
to shift the decimal). Puts generate
negative delta because they have a
negative relationship with the
underlying; that is, put premiums fall
when the underlying rises and vice
versa.
Conversely, call options have a
positive relationship with the price of
the underlying: If the underlying rises,
so does the call premium provided there
are no changes in other variables such
as implied volatility or time remaining
until expiration. If the price of the
underlying falls, the call premium will
also decline provided all other things
remain constant.8
Delta changes as an option becomes
more valuable or in-the-money. In-themoney means that the value of the
option increases due to the option’s
strike price being more favorable to the
underlying’s price. As the option gets
further in the money, Delta approaches
100 on a call and ¥100 on a put with
the extremes eliciting a one-for-one
relationship between changes in the
option price and changes in the price of
the underlying. In effect, at Delta values
of ¥100 and 100, the option behaves
like the underlying in terms of price
changes.9
Gamma
The Gamma (G), sometimes referred to
as the option’s curvature, is the rate of
change in the delta as the underlying
price changes. The gamma is usually
expressed in deltas gained or lost per
7 See
Exchange Rule 518(a)(5).
Summa, Option Greeks: The 4 Factors to
Measure Risks, Investopedia (July 18, 2019), https://
www.investopedia.com/trading/getting-to-know-thegreeks/
9 See id.
8 John
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one-point change in the underlying,
with the delta increasing by the amount
of gamma when the underlying rises
and falling by the amount of the gamma
when the underlying falls. If an option
has a gamma of 5, for each point rise
(fall) in the price of the underlying, the
option will gain (lose) 5 deltas. If the
option initially has a delta of 25 and the
underlying moves up (down) one full
point, the new delta will be 30 (20).10
Theta
An option’s value is made up of
intrinsic value 11 and time value.12 As
time passes, the time-value portion
gradually disappears until, at
expiration, the option is worth exactly
its intrinsic value. The theta (Q), or time
decay, is the rate at which an option
loses value as time passes, assuming
that all other market conditions remain
unchanged. It is usually expressed as
value lost per one day’s passage of time.
An option with a theta of 0.05 will lose
0.05 in value for each day that passes
with no movement in the underlying
contract. If its theoretical value today is
4.00, one day later it will be worth 3.95.
Two days later it will be worth 3.90.13
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Vega
Just as option values are sensitive to
changes in the underlying price (delta)
and to the passage of time (theta), they
are also sensitive to changes in
volatility. Although the terms delta,
gamma, and theta are used by all option
traders, there is no one generally
accepted term for the sensitivity of an
option’s theoretical value to a change in
volatility. The most commonly used
term in the trading community is vega.14
The vega of an option is usually
expressed as the change in theoretical
value for each one percentage point
change in volatility. Because all options
gain value with rising volatility, the
vega for both calls and puts is positive.
If an option has a vega of 0.15, for each
percentage point increase (decrease) in
volatility, the option will gain (lose)
0.15 in theoretical value. If the option
has a theoretical value of 3.25 at a
volatility of 20 percent, then it will have
a theoretical value of 3.40 at a volatility
of 21 percent and a theoretical value of
3.10 at a volatility of 19 percent.15
10 Sheldon Natenberg, Option Volatility & Pricing
105 (McGraw Hill Education., 2nd ed. 2015).
11 The intrinsic value or an option is the
difference between the price of the underlying asset
and the strike price.
12 Time value is equal to the option premium
minus its intrinsic value.
13 Sheldon Natenberg, Option Volatility & Pricing
108 (2nd ed. 2015).
14 Sheldon Natenberg, Option Volatility & Pricing
110 (2nd ed. 2015).
15 See id.
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Options can be traded not only for
profits attributable to movements in the
underlying, but also for profits
attributable to changes in other factors
such as volatility or the amount of time
left until expiration. An investor may
seek exposure to the Greeks (i.e., Delta,
Gamma, Theta, and Vega) while
minimizing exposure to movements in
the price of the underlying by creating
a delta neutral position. An options
position could be hedged with options
exhibiting a delta that is opposite to that
of the current options holding to
maintain a delta neutral position.
provides the investor volatility
exposure.
Delta Neutral
Creation of a Synthetic Underlying
Position
Delta hedging is an options strategy
that aims to reduce or hedge, the risk
associated with price movements in the
underlying asset.16 Strategies that
involve creating a delta neutral position
are typically used for one of three main
purposes. They can be used to profit
from time decay, or from volatility, or
they can be used to hedge an existing
position and protect it against small
price movements.17
A delta neutral position is one in
which the overall delta is approximately
zero, which minimizes the options’
price movements in relation to the
underlying asset. For example, assume
an investor holds one call option with
a delta of 0.50, which indicates the
option is at-the-money and wishes to
maintain a delta neutral position. The
investor could purchase an at-themoney put option with a delta of ¥0.50
to offset the positive delta, which would
make the position have a delta of zero,
thereby minimizing unwanted exposure
to the price of the underlying and
allowing the investor to focus instead on
the desired exposure (i.e., Delta,
Gamma, Theta, or Vega).
An options position could also be
delta hedged using shares of the
underlying stock. One share of the
underlying stock has a delta of one as
the stock’s value changes by $1. For
example, assume an investor is long one
call option on a stock with a delta of
0.75—or 75 since options have a
multiplier of 100. In this case, the
investor could delta hedge the call
option by selling 75 shares of the
underlying stock.18
Following is an example of a delta
neutral stock-option order which
16 James Chen, Delta Hedging, Investopedia (May
22, 2019), https://www.investopedia.com/terms/d/
deltahedging.asp.
17 Delta Neutral Options Strategies,
OptionsTrading.Org, https://
www.optionstrading.org/strategies/other/deltaneutral/.
18 See supra note 16.
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Example #1
Strategy 1: Buy 8 XYZ May 18 Calls and Sell
100 Shares XYZ Underlying (25 times)
Buy 8(25×) XYZ May18 Calls
Sell 100(25×) Shares XYZ Underlying
Buy 8 XYZ May 18 Calls (12.5 delta)
Sell 100 XYZ Shares (100 delta) (where 100
shares of the underlying = 1 option
contract)
(8 * 12.5 delta) + (¥1 * 100 delta)
+100 delta ¥ 100 delta = 0 delta
Strategy 1 Position = +200 XYZ May 18
Calls—2500 shares of XYZ
Buying a call on an equity stock and
selling a put on an equity stock, (or
selling a call on an equity stock and
buying a put on an equity stock), with
the same expiration date and strike
price results in the creation of a
synthetic stock position. For example,
assume a call and put for XYZ have a
strike price of $15. Buying a call gives
the buyer the right, but not the
obligation, to purchase the stock (XYZ)
at the strike price ($15). Selling a put
imposes upon the seller the obligation,
(and not just the right), to purchase the
stock (XYZ) at the strike price ($15),
should the put be exercised.
If the stock price of XYZ is greater
than the strike price of the call option
($15) at expiration, the call option may
be exercised and the holder of the call
option has the right to purchase XYZ at
$15 resulting in a long position of 100
shares of XYZ. If the stock price of XYZ
is greater than the strike price of the put
option ($15), the put expires worthless
as the holder of the put can sell shares
on the open market at a price greater
than the option’s strike price.
If the stock price of XYZ is less than
the strike price of the call option ($15),
the call option expires worthless as it is
cheaper to purchase the stock on the
open market. If the stock price of XYZ
is less than the strike price of the put
option at expiration, the put will be
exercised and the seller of the put will
be obligated to purchase 100 shares of
XYZ.
The net result is that the combination
of buying a call and selling a put with
the same expiration date and strike
price results in an effective (or
synthetic) long position of 100 shares of
XYZ stock, regardless of whether the
stock price is above or below the strike
price of the call or put option. Similarly,
selling the call and buying the put for
the same expiration date and strike
price would result in an effective (or
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synthetic) short position of 100 shares of
XYZ stock (¥100).
Example #2 below provides an
example of a synthetic underlying.
Example #2 (Reversal or Conversion)
Strategy 2: Sell 1 XYZ May 15 Call, Buy 1
XYZ May 15 Put and Buy 100 XYZ Stock
(25 times)
Combination:
Sell 1(25×) XYZ May 15 Calls
Buy 1(25×) XYZ May 15 Puts
Stock:
Buy 100(25×) shares XYZ Stock
Sell 1 XYZ May 15 Call (55 delta)
Buy 1 XYZ May 15 Put (45 delta)
Buy 100 XYZ shares (100 delta) (where 100
shares of stock = 1 option)
(¥1 * 55 delta) + (1 * ¥45 delta) + (1 *
100 delta)
¥55 + (¥45) + 100 = 0
Strategy 2 Position = ¥25 May 15 Calls
+25 May 15 Puts + 2500 XYZ Stock
Example #3 (Combining the Positions of
Strategy 1 and 2)
Strategy 1 Position: +200 XYZ May 18 Calls
¥ 2500 XYZ Stock
Strategy 2 Position: ¥25 XYZ May 15 Calls
+25 XYZ May 15 Put + 2500 XYZ Stock
Net Position:
+ 200 XYZ May 18 Calls ¥25 XYZ May 15
Calls +25 XYZ May 15 Puts
+2500 deltas (200 × 12.5)
¥2500 deltas (¥25 × 55) + (25 × ¥45)
0 net deltas
Combined the equation may be expressed as:
(200 × 12.5) + (¥25 × 55) + (25 × ¥45)
=0
The net position that results from
combining Strategy 1 from Example #1
above and Strategy 2 from Example #2
above is a long position of 200 May 18
Calls—the May 15 Combination 25x (a
short synthetic stock position of 2,500
shares as a result of selling a call and
buying a put with the same expiration
date and strike price.) 19
Proposal
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The Exchange now proposes to adopt
Interpretation and Policy .07 to Rule
518, to codify and further facilitate delta
neutral hedging for SPIKES options.
Members 20 on the Exchange that
transact in SPIKES options currently
have the ability to submit complex
orders which are delta neutral, so long
as the component ratio conforms to the
19 Strategy 1 and Strategy 2 may currently be
entered and executed on the Exchange under the
Exchange’s current rules.
20 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
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current rule for complex orders of 1:3/
3:1.21
The Exchange now proposes to adopt
a definition of a ‘‘SPIKES Combination’’
as a purchase (sale) of a SPIKES call
option and the sale (purchase) of a
SPIKES put option having the same
expiration date and strike price. The
Exchange also proposes to adopt a
definition for ‘‘delta’’ as the positive
(negative) number of SPIKES
Combinations that must be sold
(purchased) to establish a market
neutral hedge with one or more SPIKES
option series. Additionally, the
Exchange proposes to adopt a definition
for a ‘‘SPIKES Combo Order’’ as an
order to purchase or sell one or more
SPIKES option series and the offsetting
number of SPIKES Combinations
defined by the delta.
The Exchange proposes to adopt a
provision that states for the purposes of
this Rule a SPIKES Combo Order may
not have a ratio greater than eight
options to one SPIKES Combination
(8:1). The Exchange proposes to use this
ratio as it is already a defined
conforming ratio in the Exchange’s
System 22 used for stock-option orders
and it will allow the Exchange to
implement the trading of SPIKES
Combo Orders in a fashion similar to
stock-option orders. Currently, stockoptions may be traded in a ratio of eightto-one, where the ratio represents
contracts to the underlying security.
Similarly, the Exchange proposes to use
the same ratio for SPIKES Combo Orders
where the ratio would represent
contracts to SPIKES Combination
Orders. Lastly, the Exchange proposes to
add an internal cross reference to state
that SPIKES Combo Orders will be
subject to the same provisions of Rule
518 that complex orders on the
Exchange are subject to, with the
exception of the 1:3/3:1 ratio
requirement as described in Rule 518.
SPIKES options do not have an
underlying that can serve as a hedge, as
the option is based on an Index.
However, a synthetic underlying
position may be created by purchasing
a call and selling a put (or selling a call
and purchasing a put), as discussed
above. A SPIKES Combination Order
creates a synthetic underlying position
that is the functional equivalent of the
stock leg in stock-option orders.
Therefore, the Exchange proposes to
amend the ratio from 1:3/3:1 to 8:1 for
SPIKES Combo Orders to align the
treatment of these orders to that of
21 See
Exchange Rule 518(a)(5).
term ‘‘System’’ means the automated
trading system used by the Exchange for the trading
of securities. See Exchange Rule 100.
22 The
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stock-option orders. This will allow for
more transactions with better hedging
opportunities.
Below is an example of a SPIKES
delta neutral strategy that provides the
investor exposure to the Greeks that
may be created under the Exchange’s
proposal to allow SPIKES Combo Orders
to leverage the 8:1 ratio afforded stockoption orders.
Example #4
Strategy A: Buy 8 SPIKES May 18 Calls, Sell
1 SPIKES May 15 Call, and Buy 1
SPIKES May 15 Put (25 times)
Calls:
Buy 8(25) SPIKES May 18 Calls
Combination:
Sell 1(25) SPIKES May 15 Call
Buy 1(25) SPIKES May 15 Puts
Buy 8 SPIKES May 18 Calls (12.5 delta)
Sell 1 SPIKES May 15 Call (55 delta)
Buy 1 SPIKES May 15 Put (45 delta)
(8 * 12.5) + (¥1 * 55) + (1 * ¥45)
100 ¥ 55 ¥ 45 = 0
Net Position: + 200 SPIKES May 18 Calls
¥25 SPIKES May 15 Calls +25 SPIKES
May 15 Puts
+2500 deltas (200 × 12.5)
¥2500 deltas (¥25 × 55) + (25 × ¥45)
0 net delta
Combined the equation may be expressed as:
(200 × 12.5) + (¥25 × 55) + (25 × ¥45)
=0
Example #4 illustrates a delta neutral
position in SPIKES which is identical to
the net delta neutral position
demonstrated in Example #1 for a stockoption order. This position may be
accomplished in a single transaction by
using the proposed SPIKES Combo
Order which includes a SPIKES
Combination order. The SPIKES
Combination order (sell call, buy put
with the same expiration date and strike
price) creates the synthetic underlying
position for the SPIKES option, similar
to the way selling the XYZ call and
buying the XYZ put creates the
synthetic stock position demonstrated
in Example #3.
Under the Exchange’s proposal,
SPIKES Combination orders would be
treated similar to the stock-leg
component of a stock-option order. As
demonstrated in Example #3 above, the
stock leg component of a stock-option
order can be created synthetically by
selling a call and buying a put option
with the same expiration date and strike
price. The Exchange proposes to define
this transaction as a SPIKES
Combination order and allow SPIKES
Combo Orders to be treated similarly to
stock-option orders by permitting these
orders to leverage the 8–1 ratio defined
for stock-option orders. The Exchange
believes that a ratio greater than three-
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to-one, but not greater than eight-to-one,
would allow investors the opportunity
to create additional delta neutral
transactions with SPIKES Index options.
Therefore, the Exchange proposes to
adopt new rule text to state that for the
purposes of Rule 518 a SPIKES Combo
Order may not have a ratio greater than
eight-to-one, in order to facilitate
hedging SPIKES options with SPIKES
Combo Orders.
The Exchange represents that it has
the System capacity and capability to
handle the potential increase in
transaction rates. Further, the Exchange
represents that it has surveillances in
place to surveil for conduct that violates
the Exchange’s rules, specifically as it
pertains to delta neutral transactions as
described herein.
orders. The Exchange’s proposal
promotes just and equitable principles
of trade and removes impediments to
and perfects the mechanisms of a free
and open market and a national market
system and, in general, protects
investors and the public interest, by
providing similar hedging capabilities
as afforded stock-option orders.
Additionally, other exchanges that
offer options on index products provide
for the creation of delta neutral
strategies.25 Providing investors the
ability to create delta neutral
transactions similar to those created on
other exchanges reduces investor
confusion and in turn strengthens
investor confidence in the marketplace
by providing consistency among
exchanges.
2. Statutory Basis
MIAX Options believes that its
proposed rule change is consistent with
Section 6(b) of the Act 23 in general, and
furthers the objectives of Section 6(b)(5)
of the Act 24 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanisms of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Exchange’s proposal promotes
just and equitable principles of trade
and removes impediments to and
perfects the mechanisms of a free and
open market and a national market
system and, in general, protects
investors and the public interest, by
further facilitating the creation of delta
neutral transactions in SPIKES options.
Delta neutral strategies protect investors
and the public interest by providing a
means to gain exposure to other
elements related to the price of an
option while reducing the risk
associated with changes in the price of
the underlying. Permitting additional
delta neutral transactions will improve
liquidity in the marketplace which will
benefit all investors. Additionally, the
Exchange’s proposal protects investors
and the public interest as all the rules
applicable to complex orders on the
Exchange will apply equally to SPIKES
Combo Orders, with the exception of the
3:1/1:3 ratio limitation.
The proposed 8:1 ratio for SPIKES
Combo Orders is already a conforming
ratio on the Exchange for stock-option
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. The
Exchange’s proposal will not impose
any burden on inter-market competition
as the Exchange’s proposal is
specifically for SPIKES Index options
which are a Proprietary Product 26 of the
Exchange, and are not listed or traded
on any other venue.
The Exchange does not believe the
proposed rule change will impose any
burden on intra-market competition as
the rules of the Exchange are applicable
to all Members equally. Any Member of
the Exchange may trade SPIKES options
and all Members can benefit from the
creation of delta neutral transactions as
described in this proposal.
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.
23 15
24 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor 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
up to 90 days (i) as the Commission may
25 See NYSE American Rule 965NY and Cboe
Exchange Rule 24.20.
26 The term ‘‘Proprietary Product’’ means a class
of options that is listed exclusively on the Exchange
and any of its affiliates. See Exchange Rule 100.
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43215
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MIAX–2019–37 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2019–37. 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 website (https://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 website 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
10:00 a.m. and 3:00 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
E:\FR\FM\20AUN1.SGM
20AUN1
43216
Federal Register / Vol. 84, No. 161 / Tuesday, August 20, 2019 / Notices
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2019–37, and
should be submitted on or before
September 10, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–17846 Filed 8–19–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86661; File No. SR–
CboeEDGX–2019–025]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Relating To
Clarify Portions of Its Rules Under
Chapter 14 (Securities Traded) Related
to the Applicability of Certain
Disclosure Requirements
August 14, 2019.
jbell on DSK3GLQ082PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 31,
2019, Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of
the Act 3 and Rule 19b–4(f)(6)
thereunder.4 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
Cboe EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) proposes to
clarify portions of its rules under
Chapter 14 (Securities Traded) related to
the applicability of certain disclosure
requirements. The text of the proposed
rule change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/edgx/),
27 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
1 15
VerDate Sep<11>2014
20:49 Aug 19, 2019
Jkt 247001
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 Exchange proposes to clarify
portions of the rules under Chapter 14
(Securities Traded) related to the
applicability of certain disclosure
requirements.
Currently, under Rule 14.1 (Unlisted
Trading Privileges), Rule 14.2
(Investment Company Units), and Rule
14.8 (Portfolio Depositary Receipts) a
Member is required to provide to all
purchasers a written description of the
terms and characteristics of the
applicable securities (or a ‘‘product
description’’). In addition, Members also
have a separate prospectus delivery
requirement under Section 24(d) of the
Investment Company Act of 1940
(‘‘1940 Act’’). A Member, however, is
not required to send a Section 24(d)
prospectus for a security if such security
is subject of an order by the Securities
and Exchange Commission
(‘‘Commission’’) exempting it from
Section 24(d) prospectus delivery
requirements, and is not otherwise
subject to prospectus delivery
requirements under the Securities Act of
1933 (‘‘1933 Act’’). As such, the
Exchange provides rules requiring
Members to deliver a product
description for securities exempt from
the prospectus delivery requirements.
The Exchange notes that a product
description is a written description of
the terms and characteristics of a
security in a form prepared or approved
by the Exchange, whereas a prospectus
is a legal document required by and
filed with the Commission which
contains detailed disclosers about a
security.
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
Currently, Rule 14.1(c)(3)(A), Rule
14.2(d)(1), and Rule 14.8(j)(1) provide
govern the written description
requirements for derivative securities
traded under unlisted trading privileges
(‘‘UTP Derivative Securities’’), series of
Investment Company Units, and series
of Portfolio Depositary Receipts,
respectively. As written, these
subparagraphs under their respective
Rules do not make it explicit to
Members that the product description
requirement is applicable only to
prospectus-exempt products.
Furthermore, current Rules 14.2(d)(1)
and 14.8(j)(1) do not contain a provision
(like that of 14.1(c)(3)(B)) that the
Exchange will inform its Members by
means of an information circular when
the product description delivery
requirements apply. Therefore, in order
to provide Members with better
understanding of the provisions in
connection with these requirements, the
Exchange now proposes to amend its
rules to explicitly state that the product
description delivery requirements apply
only to the respective products that are
exempt from the 1940 Act prospectus
delivery requirements and are not
otherwise subject to the prospectus
delivery requirements under the 1933
Act. The Exchange also proposes to add
language to Rule 14.2(d)(1) and Rule
14.8(j)(1) to inform Members that the
Exchange will announce the
applicability of the product description
delivery requirements to particular
series of Portfolio Depositary Receipts or
Investment Company Units via
information circular. This change is
intended to provide clarity to Members
regarding when and how the Exchange
will notify Members of their product
delivery obligations. The Exchange
notes that Rule 14.1(c)(3)(B) currently
provides that the Exchange informs its
Members of the application of product
description delivery requirements
related to UTP Derivative Securities by
means of information circular. The
Exchange also notes that the proposed
amendments are substantially similar to
the disclosure requirement provision
currently applicable to Managed Fund
Shares on its affiliated exchange, Cboe
BZX Exchange, Inc. (‘‘BZX’’).5
The Exchange proposes to update the
heading of Rule 14.1(c)(3)(A), which
currently states ‘‘Prospectus Delivery’’,
to ‘‘Scope of Product Description’’ as it
believes this better aligns with the
requirements provided for under
paragraph (c)(3), thus provides further
clarity regarding the product description
requirements contained within this
paragraph.
5 See
E:\FR\FM\20AUN1.SGM
BZX Rule 14.11(i)(6).
20AUN1
]]>Agencies
[Federal Register Volume 84, Number 161 (Tuesday, August 20, 2019)]
[Notices]
[Pages 43212-43216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17846]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86682; File No. SR-MIAX-2019-37]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing of a Proposed Rule Change To Amend
Exchange Rule 518, Complex Orders, To Adopt New Interpretation and
Policy .07
August 14, 2019.
Pursuant to the provisions of 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 August 9, 2019, Miami International Securities
Exchange, LLC (``MIAX Options'' or the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') a 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposal to amend Exchange Rule 518,
Complex Orders, to adopt new Interpretation and Policy .07.
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/ at MIAX Options'
principal office, 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 Exchange proposes to amend Exchange Rule 518, Complex Orders,
to adopt new Interpretation and Policy .07, SPIKES Combo Orders, to
further facilitate delta neutral transactions for investors that use
complex orders to trade SPIKES options.
Complex Orders on the Exchange
Under the Exchange's current rule a ``complex order'' is any order
involving the concurrent purchase and/or sale of two or more different
options in the same underlying security (the ``legs'' or ``components''
of the complex order), for the same account, in a ratio that is equal
to or greater than one-to-three (.333) and less than or equal to three-
to-one (3.00) and for the purposes of executing a particular investment
strategy.\3\ This allows the Exchange to place the complex strategy \4\
on the Exchange's Strategy Book.\5\ All strategies placed on the
Exchange's Strategy Book conform to this allowable ratio (``conforming
strategy'').\6\ The ratio between the size of the smallest sized option
component and the largest sized option component must be equal to or
greater than one-to-three (1:3) or less than or equal to three-to-one
(3:1). (e.g., Buy 30 XYZ May 18 Calls, Sell 10 XYZ April 16 Calls
(30:10 or 3:1))
---------------------------------------------------------------------------
\3\ See Exchange Rule 518(a)(5).
\4\ The term ``complex strategy'' means a particular combination
of components and their ratios to one another. New Complex
strategies can be created as the result of the receipt of a complex
order or by the Exchange for a complex strategy that is not
currently in the System. The Exchange may limit the number of new
complex strategies that may be in the System at a particular time
and will communicate this limitation to Members via Regulatory
Circular. See Exchange Rule 518(a)(6).
\5\ The ``Strategy Book'' is the Exchange's electronic book or
complex orders and complex quotes. See Exchange Rule 518(a)(17).
\6\ The Exchange notes that orders representing non-conforming
strategies are rejected.
---------------------------------------------------------------------------
A complex order can also be a ``stock-option order.'' A stock-
option order is an order to buy or sell a stated number of units of an
underlying security (stock or Exchange Traded Fund Share (``ETF'')) or
a security convertible into the underlying stock (``convertible
security'') coupled with the purchase or sale of options contract(s) on
the opposite side of the market representing either (i) the same number
of units of the underlying security or convertible security, or (ii)
the number of units of the underlying stock necessary to create a delta
neutral position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying security or convertible security (i.e., contracts) in the
option leg to the total number of units of the underlying security
(i.e., 100 shares) or convertible security in the stock leg.\7\
---------------------------------------------------------------------------
\7\ See Exchange Rule 518(a)(5).
---------------------------------------------------------------------------
An option's price can be influenced by a number of different
factors. Some of these are known as the ``Greeks'' because they are
commonly abbreviated with Greek letters; Delta, Gamma, Theta, and Vega.
Delta
The Delta ([Delta]) is a measure of the change in an option's price
(premium of an option) resulting from a change in the underlying
security. The value of Delta ranges from -100 to 0 for puts and 0 to
100 for calls (multiplied by 100 to shift the decimal). Puts generate
negative delta because they have a negative relationship with the
underlying; that is, put premiums fall when the underlying rises and
vice versa.
Conversely, call options have a positive relationship with the
price of the underlying: If the underlying rises, so does the call
premium provided there are no changes in other variables such as
implied volatility or time remaining until expiration. If the price of
the underlying falls, the call premium will also decline provided all
other things remain constant.\8\
---------------------------------------------------------------------------
\8\ John Summa, Option Greeks: The 4 Factors to Measure Risks,
Investopedia (July 18, 2019), https://www.investopedia.com/trading/getting-to-know-the-greeks/
---------------------------------------------------------------------------
Delta changes as an option becomes more valuable or in-the-money.
In-the-money means that the value of the option increases due to the
option's strike price being more favorable to the underlying's price.
As the option gets further in the money, Delta approaches 100 on a call
and -100 on a put with the extremes eliciting a one-for-one
relationship between changes in the option price and changes in the
price of the underlying. In effect, at Delta values of -100 and 100,
the option behaves like the underlying in terms of price changes.\9\
---------------------------------------------------------------------------
\9\ See id.
---------------------------------------------------------------------------
Gamma
The Gamma ([Gamma]), sometimes referred to as the option's
curvature, is the rate of change in the delta as the underlying price
changes. The gamma is usually expressed in deltas gained or lost per
[[Page 43213]]
one-point change in the underlying, with the delta increasing by the
amount of gamma when the underlying rises and falling by the amount of
the gamma when the underlying falls. If an option has a gamma of 5, for
each point rise (fall) in the price of the underlying, the option will
gain (lose) 5 deltas. If the option initially has a delta of 25 and the
underlying moves up (down) one full point, the new delta will be 30
(20).\10\
---------------------------------------------------------------------------
\10\ Sheldon Natenberg, Option Volatility & Pricing 105 (McGraw
Hill Education., 2nd ed. 2015).
---------------------------------------------------------------------------
Theta
An option's value is made up of intrinsic value \11\ and time
value.\12\ As time passes, the time-value portion gradually disappears
until, at expiration, the option is worth exactly its intrinsic value.
The theta ([Theta]), or time decay, is the rate at which an option
loses value as time passes, assuming that all other market conditions
remain unchanged. It is usually expressed as value lost per one day's
passage of time. An option with a theta of 0.05 will lose 0.05 in value
for each day that passes with no movement in the underlying contract.
If its theoretical value today is 4.00, one day later it will be worth
3.95. Two days later it will be worth 3.90.\13\
---------------------------------------------------------------------------
\11\ The intrinsic value or an option is the difference between
the price of the underlying asset and the strike price.
\12\ Time value is equal to the option premium minus its
intrinsic value.
\13\ Sheldon Natenberg, Option Volatility & Pricing 108 (2nd ed.
2015).
---------------------------------------------------------------------------
Vega
Just as option values are sensitive to changes in the underlying
price (delta) and to the passage of time (theta), they are also
sensitive to changes in volatility. Although the terms delta, gamma,
and theta are used by all option traders, there is no one generally
accepted term for the sensitivity of an option's theoretical value to a
change in volatility. The most commonly used term in the trading
community is vega.\14\
---------------------------------------------------------------------------
\14\ Sheldon Natenberg, Option Volatility & Pricing 110 (2nd ed.
2015).
---------------------------------------------------------------------------
The vega of an option is usually expressed as the change in
theoretical value for each one percentage point change in volatility.
Because all options gain value with rising volatility, the vega for
both calls and puts is positive. If an option has a vega of 0.15, for
each percentage point increase (decrease) in volatility, the option
will gain (lose) 0.15 in theoretical value. If the option has a
theoretical value of 3.25 at a volatility of 20 percent, then it will
have a theoretical value of 3.40 at a volatility of 21 percent and a
theoretical value of 3.10 at a volatility of 19 percent.\15\
---------------------------------------------------------------------------
\15\ See id.
---------------------------------------------------------------------------
Options can be traded not only for profits attributable to
movements in the underlying, but also for profits attributable to
changes in other factors such as volatility or the amount of time left
until expiration. An investor may seek exposure to the Greeks (i.e.,
Delta, Gamma, Theta, and Vega) while minimizing exposure to movements
in the price of the underlying by creating a delta neutral position. An
options position could be hedged with options exhibiting a delta that
is opposite to that of the current options holding to maintain a delta
neutral position.
Delta Neutral
Delta hedging is an options strategy that aims to reduce or hedge,
the risk associated with price movements in the underlying asset.\16\
Strategies that involve creating a delta neutral position are typically
used for one of three main purposes. They can be used to profit from
time decay, or from volatility, or they can be used to hedge an
existing position and protect it against small price movements.\17\
---------------------------------------------------------------------------
\16\ James Chen, Delta Hedging, Investopedia (May 22, 2019),
https://www.investopedia.com/terms/d/deltahedging.asp.
\17\ Delta Neutral Options Strategies, OptionsTrading.Org,
https://www.optionstrading.org/strategies/other/delta-neutral/.
---------------------------------------------------------------------------
A delta neutral position is one in which the overall delta is
approximately zero, which minimizes the options' price movements in
relation to the underlying asset. For example, assume an investor holds
one call option with a delta of 0.50, which indicates the option is at-
the-money and wishes to maintain a delta neutral position. The investor
could purchase an at-the-money put option with a delta of -0.50 to
offset the positive delta, which would make the position have a delta
of zero, thereby minimizing unwanted exposure to the price of the
underlying and allowing the investor to focus instead on the desired
exposure (i.e., Delta, Gamma, Theta, or Vega).
An options position could also be delta hedged using shares of the
underlying stock. One share of the underlying stock has a delta of one
as the stock's value changes by $1. For example, assume an investor is
long one call option on a stock with a delta of 0.75--or 75 since
options have a multiplier of 100. In this case, the investor could
delta hedge the call option by selling 75 shares of the underlying
stock.\18\
---------------------------------------------------------------------------
\18\ See supra note 16.
---------------------------------------------------------------------------
Following is an example of a delta neutral stock-option order which
provides the investor volatility exposure.
Example #1
Strategy 1: Buy 8 XYZ May 18 Calls and Sell 100 Shares XYZ
Underlying (25 times)
Buy 8(25x) XYZ May18 Calls
Sell 100(25x) Shares XYZ Underlying
Buy 8 XYZ May 18 Calls (12.5 delta)
Sell 100 XYZ Shares (100 delta) (where 100 shares of the
underlying = 1 option contract)
(8 * 12.5 delta) + (-1 * 100 delta)
+100 delta - 100 delta = 0 delta
Strategy 1 Position = +200 XYZ May 18 Calls--2500 shares of XYZ
Creation of a Synthetic Underlying Position
Buying a call on an equity stock and selling a put on an equity
stock, (or selling a call on an equity stock and buying a put on an
equity stock), with the same expiration date and strike price results
in the creation of a synthetic stock position. For example, assume a
call and put for XYZ have a strike price of $15. Buying a call gives
the buyer the right, but not the obligation, to purchase the stock
(XYZ) at the strike price ($15). Selling a put imposes upon the seller
the obligation, (and not just the right), to purchase the stock (XYZ)
at the strike price ($15), should the put be exercised.
If the stock price of XYZ is greater than the strike price of the
call option ($15) at expiration, the call option may be exercised and
the holder of the call option has the right to purchase XYZ at $15
resulting in a long position of 100 shares of XYZ. If the stock price
of XYZ is greater than the strike price of the put option ($15), the
put expires worthless as the holder of the put can sell shares on the
open market at a price greater than the option's strike price.
If the stock price of XYZ is less than the strike price of the call
option ($15), the call option expires worthless as it is cheaper to
purchase the stock on the open market. If the stock price of XYZ is
less than the strike price of the put option at expiration, the put
will be exercised and the seller of the put will be obligated to
purchase 100 shares of XYZ.
The net result is that the combination of buying a call and selling
a put with the same expiration date and strike price results in an
effective (or synthetic) long position of 100 shares of XYZ stock,
regardless of whether the stock price is above or below the strike
price of the call or put option. Similarly, selling the call and buying
the put for the same expiration date and strike price would result in
an effective (or
[[Page 43214]]
synthetic) short position of 100 shares of XYZ stock (-100).
Example #2 below provides an example of a synthetic underlying.
Example #2 (Reversal or Conversion)
Strategy 2: Sell 1 XYZ May 15 Call, Buy 1 XYZ May 15 Put and Buy 100
XYZ Stock (25 times)
Combination:
Sell 1(25x) XYZ May 15 Calls
Buy 1(25x) XYZ May 15 Puts
Stock:
Buy 100(25x) shares XYZ Stock
Sell 1 XYZ May 15 Call (55 delta)
Buy 1 XYZ May 15 Put (45 delta)
Buy 100 XYZ shares (100 delta) (where 100 shares of stock = 1
option)
(-1 * 55 delta) + (1 * -45 delta) + (1 * 100 delta)
-55 + (-45) + 100 = 0
Strategy 2 Position = -25 May 15 Calls +25 May 15 Puts + 2500
XYZ Stock
Example #3 (Combining the Positions of Strategy 1 and 2)
Strategy 1 Position: +200 XYZ May 18 Calls - 2500 XYZ Stock
Strategy 2 Position: -25 XYZ May 15 Calls +25 XYZ May 15 Put + 2500
XYZ Stock
Net Position:
+ 200 XYZ May 18 Calls -25 XYZ May 15 Calls +25 XYZ May 15 Puts
+2500 deltas (200 x 12.5)
-2500 deltas (-25 x 55) + (25 x -45)
------------------------------------------------------------------------
0 net deltas
Combined the equation may be expressed as: (200 x 12.5) + (-25 x 55)
+ (25 x -45) = 0
The net position that results from combining Strategy 1 from
Example #1 above and Strategy 2 from Example #2 above is a long
position of 200 May 18 Calls--the May 15 Combination 25x (a short
synthetic stock position of 2,500 shares as a result of selling a call
and buying a put with the same expiration date and strike price.) \19\
---------------------------------------------------------------------------
\19\ Strategy 1 and Strategy 2 may currently be entered and
executed on the Exchange under the Exchange's current rules.
---------------------------------------------------------------------------
Proposal
The Exchange now proposes to adopt Interpretation and Policy .07 to
Rule 518, to codify and further facilitate delta neutral hedging for
SPIKES options. Members \20\ on the Exchange that transact in SPIKES
options currently have the ability to submit complex orders which are
delta neutral, so long as the component ratio conforms to the current
rule for complex orders of 1:3/3:1.\21\
---------------------------------------------------------------------------
\20\ The term ``Member'' means an individual or organization
approved to exercise the trading rights associated with a Trading
Permit. Members are deemed ``members'' under the Exchange Act. See
Exchange Rule 100.
\21\ See Exchange Rule 518(a)(5).
---------------------------------------------------------------------------
The Exchange now proposes to adopt a definition of a ``SPIKES
Combination'' as a purchase (sale) of a SPIKES call option and the sale
(purchase) of a SPIKES put option having the same expiration date and
strike price. The Exchange also proposes to adopt a definition for
``delta'' as the positive (negative) number of SPIKES Combinations that
must be sold (purchased) to establish a market neutral hedge with one
or more SPIKES option series. Additionally, the Exchange proposes to
adopt a definition for a ``SPIKES Combo Order'' as an order to purchase
or sell one or more SPIKES option series and the offsetting number of
SPIKES Combinations defined by the delta.
The Exchange proposes to adopt a provision that states for the
purposes of this Rule a SPIKES Combo Order may not have a ratio greater
than eight options to one SPIKES Combination (8:1). The Exchange
proposes to use this ratio as it is already a defined conforming ratio
in the Exchange's System \22\ used for stock-option orders and it will
allow the Exchange to implement the trading of SPIKES Combo Orders in a
fashion similar to stock-option orders. Currently, stock-options may be
traded in a ratio of eight-to-one, where the ratio represents contracts
to the underlying security. Similarly, the Exchange proposes to use the
same ratio for SPIKES Combo Orders where the ratio would represent
contracts to SPIKES Combination Orders. Lastly, the Exchange proposes
to add an internal cross reference to state that SPIKES Combo Orders
will be subject to the same provisions of Rule 518 that complex orders
on the Exchange are subject to, with the exception of the 1:3/3:1 ratio
requirement as described in Rule 518.
---------------------------------------------------------------------------
\22\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
---------------------------------------------------------------------------
SPIKES options do not have an underlying that can serve as a hedge,
as the option is based on an Index. However, a synthetic underlying
position may be created by purchasing a call and selling a put (or
selling a call and purchasing a put), as discussed above. A SPIKES
Combination Order creates a synthetic underlying position that is the
functional equivalent of the stock leg in stock-option orders.
Therefore, the Exchange proposes to amend the ratio from 1:3/3:1 to 8:1
for SPIKES Combo Orders to align the treatment of these orders to that
of stock-option orders. This will allow for more transactions with
better hedging opportunities.
Below is an example of a SPIKES delta neutral strategy that
provides the investor exposure to the Greeks that may be created under
the Exchange's proposal to allow SPIKES Combo Orders to leverage the
8:1 ratio afforded stock-option orders.
Example #4
Strategy A: Buy 8 SPIKES May 18 Calls, Sell 1 SPIKES May 15 Call,
and Buy 1 SPIKES May 15 Put (25 times)
Calls:
Buy 8(25) SPIKES May 18 Calls
Combination:
Sell 1(25) SPIKES May 15 Call
Buy 1(25) SPIKES May 15 Puts
Buy 8 SPIKES May 18 Calls (12.5 delta)
Sell 1 SPIKES May 15 Call (55 delta)
Buy 1 SPIKES May 15 Put (45 delta)
(8 * 12.5) + (-1 * 55) + (1 * -45)
100 - 55 - 45 = 0
Net Position: + 200 SPIKES May 18 Calls -25 SPIKES May 15 Calls
+25 SPIKES May 15 Puts
+2500 deltas (200 x 12.5)
-2500 deltas (-25 x 55) + (25 x -45)
------------------------------------------------------------------------
0 net delta
Combined the equation may be expressed as: (200 x 12.5) + (-25 x 55)
+ (25 x -45) = 0
Example #4 illustrates a delta neutral position in SPIKES which is
identical to the net delta neutral position demonstrated in Example #1
for a stock-option order. This position may be accomplished in a single
transaction by using the proposed SPIKES Combo Order which includes a
SPIKES Combination order. The SPIKES Combination order (sell call, buy
put with the same expiration date and strike price) creates the
synthetic underlying position for the SPIKES option, similar to the way
selling the XYZ call and buying the XYZ put creates the synthetic stock
position demonstrated in Example #3.
Under the Exchange's proposal, SPIKES Combination orders would be
treated similar to the stock-leg component of a stock-option order. As
demonstrated in Example #3 above, the stock leg component of a stock-
option order can be created synthetically by selling a call and buying
a put option with the same expiration date and strike price. The
Exchange proposes to define this transaction as a SPIKES Combination
order and allow SPIKES Combo Orders to be treated similarly to stock-
option orders by permitting these orders to leverage the 8-1 ratio
defined for stock-option orders. The Exchange believes that a ratio
greater than three-
[[Page 43215]]
to-one, but not greater than eight-to-one, would allow investors the
opportunity to create additional delta neutral transactions with SPIKES
Index options. Therefore, the Exchange proposes to adopt new rule text
to state that for the purposes of Rule 518 a SPIKES Combo Order may not
have a ratio greater than eight-to-one, in order to facilitate hedging
SPIKES options with SPIKES Combo Orders.
The Exchange represents that it has the System capacity and
capability to handle the potential increase in transaction rates.
Further, the Exchange represents that it has surveillances in place to
surveil for conduct that violates the Exchange's rules, specifically as
it pertains to delta neutral transactions as described herein.
2. Statutory Basis
MIAX Options believes that its proposed rule change is consistent
with Section 6(b) of the Act \23\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \24\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
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\23\ 15 U.S.C. 78f(b).
\24\ 15 U.S.C. 78f(b)(5).
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The Exchange's proposal promotes just and equitable principles of
trade and removes impediments to and perfects the mechanisms of a free
and open market and a national market system and, in general, protects
investors and the public interest, by further facilitating the creation
of delta neutral transactions in SPIKES options. Delta neutral
strategies protect investors and the public interest by providing a
means to gain exposure to other elements related to the price of an
option while reducing the risk associated with changes in the price of
the underlying. Permitting additional delta neutral transactions will
improve liquidity in the marketplace which will benefit all investors.
Additionally, the Exchange's proposal protects investors and the public
interest as all the rules applicable to complex orders on the Exchange
will apply equally to SPIKES Combo Orders, with the exception of the
3:1/1:3 ratio limitation.
The proposed 8:1 ratio for SPIKES Combo Orders is already a
conforming ratio on the Exchange for stock-option orders. The
Exchange's proposal promotes just and equitable principles of trade and
removes impediments to and perfects the mechanisms of a free and open
market and a national market system and, in general, protects investors
and the public interest, by providing similar hedging capabilities as
afforded stock-option orders.
Additionally, other exchanges that offer options on index products
provide for the creation of delta neutral strategies.\25\ Providing
investors the ability to create delta neutral transactions similar to
those created on other exchanges reduces investor confusion and in turn
strengthens investor confidence in the marketplace by providing
consistency among exchanges.
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\25\ See NYSE American Rule 965NY and Cboe Exchange Rule 24.20.
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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. The Exchange's proposal will
not impose any burden on inter-market competition as the Exchange's
proposal is specifically for SPIKES Index options which are a
Proprietary Product \26\ of the Exchange, and are not listed or traded
on any other venue.
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\26\ The term ``Proprietary Product'' means a class of options
that is listed exclusively on the Exchange and any of its
affiliates. See Exchange Rule 100.
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The Exchange does not believe the proposed rule change will impose
any burden on intra-market competition as the rules of the Exchange are
applicable to all Members equally. Any Member of the Exchange may trade
SPIKES options and all Members can benefit from the creation of delta
neutral transactions as described in this proposal.
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
Written comments were neither solicited nor 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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-MIAX-2019-37 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MIAX-2019-37. 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 website (https://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 website 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 10:00 a.m. and
3:00 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish
[[Page 43216]]
to make available publicly. All submissions should refer to File Number
SR-MIAX-2019-37, and should be submitted on or before September 10,
2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-17846 Filed 8-19-19; 8:45 am]
BILLING CODE 8011-01-P
