Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules Regarding Complex Orders, 942-947 [2020-00061]
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Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices
In sum, if the changes proposed
herein are unattractive to market
participants, it is likely that the
Exchange will lose market share as a
result. Accordingly, the Exchange does
not believe that the proposed changes
will impair the ability of members or
competing order execution venues to
maintain their competitive standing in
the financial markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.8
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or 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:
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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–
NASDAQ–2019–101 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–NASDAQ–2019–101. 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
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2019–101 and
should be submitted on or before
January 29, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–00060 Filed 1–7–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87883; File No. SR–CBOE–
2019–126]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Rules
Regarding Complex Orders
January 2, 2020.
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
19, 2019, Cboe Exchange, Inc.
(‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
8 15
U.S.C. 78s(b)(3)(A)(ii).
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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 amend its
Rules to adopt a new complex order
instruction, Index Combo orders, to
further facilitate delta neutral
transactions for investors that use
complex orders to trade index options.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, 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 its
Rules to adopt a new complex order
instruction, Index Combo orders, to
further facilitate delta neutral
transactions for investors that use
complex orders to trade index options.
Under the Exchange’s current Rules, a
‘‘complex order’’ is an order involving
the concurrent execution of two or more
different series in the same class (the
‘‘legs’’ or ‘‘components’’ of the complex
order), for the same account, occurring
at or near the same time and for the
purpose of executing a particular
investment strategy with no more than
the applicable number of legs (which
number the Exchange determines on a
class-by-class basis). For purposes of
Rules 5.33 (regarding electronic
processing of complex orders) and
5.85(b)(1) (regarding priority of complex
orders with respect to open outcry
trading), the term ‘‘complex order’’
means a complex order with any ratio
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equal to or greater than one-to-three
(.333) and less than or equal to three-toone (3.00), a stock-option order, or a
security future-option order.3 In other
words, the Exchange only accepts for
electronic processing complex orders
with any ratio equal to or greater than
one-to-three (.333) and less than or
equal to three-to-one (3.00). The
Exchange accepts for manual handling
complex orders with any ratio; however,
only those with a ratio equal to or
greater than one-to-three (.333) and less
than or equal to three-to-one (3.00) are
eligible for complex order increments
and complex order priority.4 The ratio
of a complex order is determined by
comparing the size of the smallest-sized
option component and the largest-sized
option component. For example, a
complex order with a leg to buy 30 XYZ
May 18 calls and sell 10 XYZ April 16
calls is three-to-one (30:10).
A complex order can also be a ‘‘stockoption order.’’ A stock-option order is
the purchase or sale of a stated number
units of an underlying stock or a
security convertible into the stock
(‘‘convertible security’’) coupled with
the purchase or sale of an option
contract(s) on the opposite side of the
market representing either (1) the same
number of units of the underlying stock
or convertible security or (2) 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 stock or convertible
security in the option leg(s) to the total
number of units of the underlying stock
or convertible security in the stock leg.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 (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,
3 See
Rule 1.1 (definition of complex order).
id.; see also Rules 5.4(b) and 5.85(b).
5 See Rule 5.33(b)(5) (definition of stock-option
order). The Rules also permit complex orders to be
security future-option orders.
4 See
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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.6 Delta changes as an
option becomes more valuable or in-themoney. 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.7
• 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 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 five, for each point rise (fall)
in the price of the underlying, the
option will gain (lose) five 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).8
• Theta: An option’s value is made
up of intrinsic value 9 and time value.10
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. If
an option’s theoretical value today is
4.00, one day later, it will be worth 3.95.
Two days later, it will be worth 3.90.11
• Vega: Just as option values are
sensitive to changes in the underlying
6 See John Summa, Option Greeks: The 4 Factors
to Measure Risks, Investopedia, available at https://
www.investopedia.com/trading/getting-to-know-thegreeks/ (October 11, 2019).
7 See id.
8 See Sheldon Natenberg, Option Volatility &
Pricing 105 (McGraw Hill Education, 2nd ed. 2015).
9 The intrinsic value of an option is the difference
between the price of the underlying asset and the
strike price.
10 The time value of an option is equal to the
option premium minus its intrinsic value.
11 See Natenberg, supra note 9 at 108.
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943
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
generally 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.12
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%, then it will have a
theoretical value of 3.40 at a volatility
of 21% and a theoretical value of 3.10
at a volatility of 19%.13
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 option
position could be hedged with options
that exhibit a delta that is opposite to
that of the current options holding to
maintain a delta neutral position. Delta
hedging is an options strategy that aims
to reduce or hedge the risk associated
with price movements in the underlying
asset.14 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.15
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-the12 See
id. at 110.
id.
14 See James Chen, Delta Hedging, Investopedia,
available at https://www.investopedia.com/terms/d/
deltahedging.asp (May 22, 2019).
15 Delta Neutral Options Strategies,
OptionsTrading.Org (December 4, 2019), available
at https://optionstrading.org/strategies/other/deltaneutral/.
13 See
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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.16 The following is an
example of a delta neutral stock-option
order, which provides the investor with
volatility exposure.
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
synthetic) short position of 100 shares of
XYZ stock (¥100). The following is an
example of a synthetic underlying.
Example #1
Strategy 1: Buy 8 XYZ May 18 Calls and
Sell 100 Shares XYZ Underlying (25
times)
Buy 8 (25x) XYZ May 18 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
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 sell 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),
Example #2
16 See
supra note 15.
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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
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
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buying a put with the same expiration
date and strike price).17
The Exchange proposes to adopt a
complex order instruction in Rule
5.33(b)(5) to codify and further facilitate
delta neutral hedging for all index
options listed for trading on the
Exchange.18 Trading Permit Holders
that transact in index options currently
have the ability to submit for electronic
processing complex orders that are delta
neutral, so long as the component ratio
conforms to the current rule for complex
orders of one-to-three/three-to-one.
Additionally, Trading Permit Holders
have the ability to submit for manual
handling complex orders that are delta
neutral in any ratio; however, only those
with a one-to-three/three-to-one ratio
are not eligible for complex order
increments or complex order priority.19
Specifically, the Exchange proposes to
adopt a definition of an ‘‘Index Combo’’
order as an order to purchase or sell one
or more index option series and the
offsetting number of Index
Combinations defined by the delta. For
purposes of an Index Combo Order, the
Exchange proposes to adopt a definition
of an ‘‘Index Combination’’ as a
purchase (sale) of an index option call
and sale (purchase) of an index option
put with the same underlying index,
expiration date, and strike price.
Additionally, the Exchange proposes to
adopt a definition of ‘‘delta’’ as the
positive (negative) number of Index
Combinations that must be sold
(purchased) to establish a market
neutral hedge with one or more series of
the same index option.20
As noted above, the Exchange lists
multiple index options for trading.
MIAX currently only lists options on
one index—the SPIKE Index. The
primary basis for MIAX’s adoption of a
SPIKES Combo Order was the lack of an
17 Strategy 1 and Strategy 2 may currently be
entered and executed on the Exchange under the
Exchange’s current rules.
18 The Exchange currently lists options on 24
indexes: Dow Jones Industrial Average (DJX), MSCI
EAFE Index (MXEA), MSCI Emerging Markets
Index (MXEF), S&P 100 Index (OEX), Russell 1000
Growth Index (RLG), Russell 1000 Value Index
(RLV), Russell 1000 Index (RUI), Russell 2000 Index
(RUT), S&P Materials Select Sector Index (SIXB),
S&P Communication Services Select Sector Index
(SIXC), S&P Energy Select Sector Index (SIXE), S&P
Industrials Select Sector Index (SIXI), S&P
Financial Select Sector (SIXM), S&P Consumer
Staples Select Sector Index (SIXR), S&P Real Estate
Select Sector Index (SIXRE), S&P Technology Select
Sector Index (SIXT), S&P Utilities Select Sector
Index (SIXU), S&P Health Care Select Sector Index
(SIXV), S&P Consumer Discretionary Select Sector
Index (SIXY), S&P 500 Index (SPX), FTSE 100 Index
(reduced-value) (UKXM), Cboe Volatility Index
(VIX), Mini-S&P 100 Index (XEO), and Mini-S&P
500 Index (XSP).
19 See Rules 5.4(b) and 5.85(b).
20 See Rule 5.33(b)(5).
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underlying for the SPIKES Index that
investors may use for hedging
purposes.21 There was nothing about the
SPIKES Combo Order specific to the
SPIKES Index itself. While MIAX
adopted a combo order for a single
index, all index options, including those
the Exchange lists for trading, lack an
underlying that investors may use for
hedging purposes. Therefore, the
Exchange believes it is appropriate to
offer investors a combo order for all
index options. Additionally, MIAX is an
electronic only exchange, while the
Exchange has a trading floor for open
outcry trading. As noted above, Trading
Permit Holders may currently engage in
delta neutral hedging for index options
electronically or on the trading floor,
subject to certain ratio restrictions. The
Exchange believes all Trading Permit
Holders should be able to use Index
Combo orders in the same manner,
regardless of whether they choose to
submit them for electronic or open
outcry trading.
The Exchange also proposes to adopt
a provision that states an Index Combo
order may not have a ratio greater than
eight options to one Index Combination
(8.00). The Exchange proposes to use
this ratio as it is already a defined
conforming ratio in the System 22 used
for stock-option orders, and it will allow
the Exchange to implement the trading
of Index 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 Index
Combo orders where the ratio would
represent contracts to Index
Combinations. Lastly, the Exchange
proposes to add an internal cross
reference to state that Index Combo
orders will be subject to all provisions
applicable to complex orders (excluding
the one-to-three/three-to-one ratio) in
the Rules.23
Index 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
21 See Securities Exchange Act Release No. 87199
(October 2, 2019), 84 FR 53786 (October 8, 2019)
(SR–MIAX–2019–37).
22 The ‘‘System’’ means the Exchange’s hybrid
trading platform that integrates electronic and open
outcry trading of option contracts on the Exchange,
and includes any connectivity to the foregoing
trading platform that is administered by or on
behalf of the Exchange, such as a communications
hub.
23 The Exchange makes conforming changes to
Rules 1.1 (definition of complex order), 5.4(b),
5.6(c) (definition of complex order), 5.30(a) and (b),
5.83(b), and 5.85(b).
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a call and selling a put (or selling a call
and purchasing a put), as discussed
above. An Index Combination 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 one-to-three/three-to-one to eightto-one for Index 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 in all index options.
Below is an example of an index
option delta neutral strategy that
provides the investor exposure to the
Greeks that may be created under the
Exchange’s proposal to allow Index
Combo orders to leverage the eight-toone ratio afforded stock-option orders.
Example #4
Strategy A: Buy 8 ABC Index May 18
Calls, Sell 1 ABC Index May 15 Calls,
and Buy 1 ABC Index May 15 Put (25
times)
Calls: Buy 8 (25) ABC Index May 18
Calls
Combination:
Sell 1 (25) ABC Index May 15 Call
Buy 1 (25) ABC Index May 15 Put
Buy 8 ABC Index May 18 Calls (12.5
Delta)
Sell 1 ABC Index May 15 Call (55
Delta)
Buy 1 ABC Index May 15 Put (45
Delta)
(8 * 12.5) + (¥1 * 55) + (1 * ¥45)
100 ¥ 55 ¥ 45 = 0
Net Position: + 200 ABC Index May 18
Calls ¥25 ABC Index May 15 Calls
+ 25 ABC Index 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
Example #4 illustrates a delta neutral
position in an index option 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 Index
Combo order, which includes an Index
Combination. The Index Combination
(sell call, buy put with the same
underlying index, expiration date, and
strike price) creates the synthetic
underlying position for the index
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, Index
Combinations would be treated similar
PO 00000
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Sfmt 4703
945
to the stock-leg component of a stockoption 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 an Index Combination
and allow Index Combo orders to be
treated similarly to stock-option orders
by permitting these orders to leverage
the eight-to-one ratio defined for stockoption orders. The Exchange believes
that a ratio greater than three-to-one, but
not greater than eight-to-one, would
allow investors the opportunity to create
additional delta neutral transactions
with index options.
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
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.24 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 25 requirements that the rules of
an exchange be 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 regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 26 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, the Exchange believes
the proposed rule change 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
24 15
25 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
26 Id.
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Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices
jbell on DSKJLSW7X2PROD with NOTICES
and, in general, protects investors and
the public interest, by further
facilitating the creation of delta neutral
transactions in index 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 Index Combo orders,
with the exception of the one-to-three/
three-to-one ratio limitation.
The proposed eight-to-one ratio for
Index 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 stockoption orders.
Additionally, another options
exchange that offers options on an index
provides for the creation of delta neutral
strategies.27 Providing investors the
ability to create delta neutral
transactions similar to those created on
another exchange reduces investor
confusion and in turn strengthens
investor confidence in the marketplace
by providing consistency among
exchanges.
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 that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition, as it will be
applicable to all Trading Permit Holders
equally. Any Trading Permit Holder
may trade index options and submit
Index Combo orders, and all Trading
Permit Holders can benefit from the
creation of delta neutral transactions as
described in this proposal. The System
will handle all Index Combo orders in
the same manner. The Exchange does
not believe the proposed rule change
27 See Miami International Securities Exchange,
LLC (‘‘MIAX’’) Rule 518, Interpretation and Policy
.07.
VerDate Sep<11>2014
17:18 Jan 07, 2020
Jkt 250001
will impose any burden on intermarket
competition, because another exchange
options offers the same order type for
the index option listed on that
exchange.28 The Exchange believes that
the proposed rule change will relieve
any burden on, or otherwise promote,
competition, because it will provide
index options with similar hedging
capabilities currently afforded stockoption orders. Additionally, providing
investors the ability to create delta
neutral transactions similar to those
created on another exchange reduces
investor confusion and in turn
strengthens investor confidence in the
marketplace by providing consistency
among exchanges.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days after the date of
the filing, or such shorter time as the
Commission may designate, the
proposed rule change has become
effective pursuant to 19(b)(3)(A) of the
Act 29 and Rule 19b–4(f)(6) 30
thereunder.
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 31 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii)
under the Act 32 permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposal may
become operative immediately upon
filing. The Exchange states that waiver
of the operative delay would provide
investors as soon as possible with
28 See
id.
U.S.C. 78s(b)(3)(A).
30 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
31 17 CFR 240.19b–4(f)(6).
32 17 CFR 240.19b–4(f)(6)(iii).
29 15
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
similar hedging capabilities for index
options that they have currently for
stock-option orders. In addition, the
Exchange notes that the proposal is not
novel or unique because another
exchange currently offers the same order
type for an index option it lists for
trading.33 The Commission finds that it
is consistent with the protection of
investors and the public interest to
waive the 30-day operative delay. The
Commission believes that the proposal
will benefit investors by permitting
additional delta neutral transactions for
index options. The Commission notes
that another options exchange currently
permits Combo Orders for options on an
index.34 Accordingly, the Commission
hereby waives the operative delay and
designates the proposal operative upon
filing.35
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or 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–
CBOE–2019–126 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–CBOE–2019–126. This file
number should be included on the
subject line if email is used. To help the
33 See supra note 21 and MIAX Rule 518,
Interpretation and Policy .07.
34 See id.
35 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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Federal Register / Vol. 85, No. 5 / Wednesday, January 8, 2020 / Notices
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
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2019–126 and
should be submitted on or before
January 29, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–00061 Filed 1–7–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87881; File No. SR–LCH
SA–2019–009]
Self-Regulatory Organizations; LCH
SA; Order Approving Proposed Rule
Change Relating to Amendments to
CDSClear Reference Guide To Allow
Index Basis Packages Margining
jbell on DSKJLSW7X2PROD with NOTICES
January 2, 2020.
I. Introduction
On October 29, 2019, Banque Centrale
de Compensation, which conducts
business under the name LCH SA (‘‘LCH
SA’’ or ‘‘CDSClear’’), filed with the
Securities and Exchange Commission
(‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
36 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
17:18 Jan 07, 2020
Jkt 250001
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder 2 a proposed rule change
relating to amendments to the CDSClear
Reference Guide (the ‘‘CDSClear Risk
Methodology’’) to allow Index Basis
Packages margining. The proposed rule
change was published for comment in
the Federal Register on November 19,
2019.3 The Commission did not receive
comments regarding the proposed rule
change. For the reasons discussed
below, the Commission is approving the
proposed rule change.
II. Description of the Proposed Rule
Change
LCH SA is proposing to amend its
CDSClear Risk Methodology in order to
allow Index Basis Packages margining as
a single instrument.4 LCH SA CDSClear
currently clears CDS on a number of
indices such as iTraxx Main, iTraxx
Cross-over, iTraxx Senior Financials as
well as all the Single Name constituents
of these indices. Indices and their
constituents are currently managed and
margined as independent instruments.
However, market participants may
execute Index Basis Packages consisting
of an Index CDS trade and individual
Single Name CDS trades on each of the
reference entities constituents of such
Index perfectly offsetting the Index.
A transaction would need to satisfy
the following criteria to constitute an
Index Basis Package:
• The package is constituted of an
Index CDS and Single Name CDS on all
the entities constituting the index;
• The position (Long/Short) on the
Index offsets the positions on the Single
Names (Short/Long);
• The notional of the Index and
across all the Singles Names match
exactly;
• All the Single Names CDS trades
have the same currency, coupon, and
maturity as constituents of the Index
CDS; and
• All the Single Name CDS trades
have the same Seniority, ISDA
Definition and Restructuring Clause as
constituents of the Index CDS.
Clearing Members and/or Clients
would be required to identify all trades
being part of an Index Basis Package and
to notify LCH SA CDSClear. CDSClear
would then perform controls to ensure
all principles and requirements stated
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Self-Regulatory Organizations; LCH SA; Notice
of Filing of Proposed Rule Change Relating to
Amendments to CDSClear Reference Guide To
Allow Index Basis Packages Margining; Exchange
Act Release No. 87522 (Nov. 13, 2019); 84 FR 63912
(Nov. 19, 2019) (‘‘Notice’’).
4 The description herein is substantially
excerpted from the Notice, 84 FR 63912.
2 17
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947
above for qualifying the trades as an
Index Basis Package are satisfied and
would flag them with a common ID
number. These trades would continue to
be margined as different trades until
LCH SA completes these controls and
confirms the qualification as an Index
Basis Package.
Once an Index Basis Package is
validated as complete, the margin
enhancement proposed in the current
rule change would then be applied as
part of the overnight margin calculation.
In order to ensure that the trades
continue to meet the criteria of an Index
Basis Package, controls would be
performed every day at the start of the
overnight batch process.
Index Basis Packages identified and
flagged as such would be excluded from
compression runs with the rest of the
portfolio in order to avoid breaking any
packages.
Index Basis Packages could be unflagged as such at the Clearing Member
and/or Client’s request. The Index CDS
and the Single Name CDS would then
be treated and margined separately as
per the current framework.
In case of a Clearing Member’s
default, CDSClear would have the
ability to liquidate Index Basis Packages
in a dedicated auction should it be
advised to do so by the Default
Management Group in order to
minimize the liquidation costs.
A. Proposed Changes to CDSClear Risk
Methodology
In order to take into account the
specific risk created by Index Basis
Packages positions, LCH SA proposes to
amend the calculation of the Spread
Margin and the calculation of the
Liquidity Charge Margin as described in
its Reference Guide, CDSClear Margin
Framework.
1. Spread Margin
LCH SA CDSClear currently considers
an Index Basis Package as multiple
instruments in the calculation of its
Spread Margin. In accordance with the
portfolio margining requirements under
Article 27 of Commission Delegated
Regulation (EU) No 153/2013 5 (the
‘‘RTS’’), LCH SA CDSClear applies a cap
of 80% to the possible margin offsets
reduction. Therefore, the Spread Margin
of an Index Basis Package is calculated
as the maximum between the expected
shortfall of the package and 20% of the
sum of the expected shortfalls
5 See https://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=OJ:L:2013:052:
0041:0074:EN:PDF.
E:\FR\FM\08JAN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 5 (Wednesday, January 8, 2020)]
[Notices]
[Pages 942-947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00061]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87883; File No. SR-CBOE-2019-126]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Rules Regarding Complex Orders
January 2, 2020.
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 19, 2019, Cboe Exchange, Inc. (``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\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 proposes to amend its Rules to adopt a new complex
order instruction, Index Combo orders, to further facilitate delta
neutral transactions for investors that use complex orders to trade
index options.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, 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 its Rules to adopt a new complex
order instruction, Index Combo orders, to further facilitate delta
neutral transactions for investors that use complex orders to trade
index options. Under the Exchange's current Rules, a ``complex order''
is an order involving the concurrent execution of two or more different
series in the same class (the ``legs'' or ``components'' of the complex
order), for the same account, occurring at or near the same time and
for the purpose of executing a particular investment strategy with no
more than the applicable number of legs (which number the Exchange
determines on a class-by-class basis). For purposes of Rules 5.33
(regarding electronic processing of complex orders) and 5.85(b)(1)
(regarding priority of complex orders with respect to open outcry
trading), the term ``complex order'' means a complex order with any
ratio
[[Page 943]]
equal to or greater than one-to-three (.333) and less than or equal to
three-to-one (3.00), a stock-option order, or a security future-option
order.\3\ In other words, the Exchange only accepts for electronic
processing complex orders with any ratio equal to or greater than one-
to-three (.333) and less than or equal to three-to-one (3.00). The
Exchange accepts for manual handling complex orders with any ratio;
however, only those with a ratio equal to or greater than one-to-three
(.333) and less than or equal to three-to-one (3.00) are eligible for
complex order increments and complex order priority.\4\ The ratio of a
complex order is determined by comparing the size of the smallest-sized
option component and the largest-sized option component. For example, a
complex order with a leg to buy 30 XYZ May 18 calls and sell 10 XYZ
April 16 calls is three-to-one (30:10).
---------------------------------------------------------------------------
\3\ See Rule 1.1 (definition of complex order).
\4\ See id.; see also Rules 5.4(b) and 5.85(b).
---------------------------------------------------------------------------
A complex order can also be a ``stock-option order.'' A stock-
option order is the purchase or sale of a stated number units of an
underlying stock or a security convertible into the stock
(``convertible security'') coupled with the purchase or sale of an
option contract(s) on the opposite side of the market representing
either (1) the same number of units of the underlying stock or
convertible security or (2) 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 stock or convertible security in the
option leg(s) to the total number of units of the underlying stock or
convertible security in the stock leg.\5\
---------------------------------------------------------------------------
\5\ See Rule 5.33(b)(5) (definition of stock-option order). The
Rules also permit complex orders to be security future-option
orders.
---------------------------------------------------------------------------
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.\6\ 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.\7\
---------------------------------------------------------------------------
\6\ See John Summa, Option Greeks: The 4 Factors to Measure
Risks, Investopedia, available at https://www.investopedia.com/trading/getting-to-know-the-greeks/ (October 11, 2019).
\7\ 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 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 five, for each point rise (fall) in the price of the
underlying, the option will gain (lose) five 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).\8\
---------------------------------------------------------------------------
\8\ See Sheldon Natenberg, Option Volatility & Pricing 105
(McGraw Hill Education, 2nd ed. 2015).
---------------------------------------------------------------------------
Theta: An option's value is made up of intrinsic value \9\
and time value.\10\ 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. If an option's theoretical value today is 4.00, one day
later, it will be worth 3.95. Two days later, it will be worth
3.90.\11\
---------------------------------------------------------------------------
\9\ The intrinsic value of an option is the difference between
the price of the underlying asset and the strike price.
\10\ The time value of an option is equal to the option premium
minus its intrinsic value.
\11\ See Natenberg, supra note 9 at 108.
---------------------------------------------------------------------------
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 generally 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.\12\ 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%, then it will have a theoretical value of 3.40 at a
volatility of 21% and a theoretical value of 3.10 at a volatility of
19%.\13\
---------------------------------------------------------------------------
\12\ See id. at 110.
\13\ 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
option position could be hedged with options that exhibit a delta that
is opposite to that of the current options holding to maintain a delta
neutral position. Delta hedging is an options strategy that aims to
reduce or hedge the risk associated with price movements in the
underlying asset.\14\ 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.\15\
---------------------------------------------------------------------------
\14\ See James Chen, Delta Hedging, Investopedia, available at
https://www.investopedia.com/terms/d/deltahedging.asp (May 22,
2019).
\15\ Delta Neutral Options Strategies, OptionsTrading.Org
(December 4, 2019), available at https://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-
[[Page 944]]
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.\16\ The following is an example of a delta neutral
stock-option order, which provides the investor with volatility
exposure.
---------------------------------------------------------------------------
\16\ See supra note 15.
---------------------------------------------------------------------------
Example #1
Strategy 1: Buy 8 XYZ May 18 Calls and Sell 100 Shares XYZ Underlying
(25 times)
Buy 8 (25x) XYZ May 18 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
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 sell 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 synthetic) short position of 100 shares of XYZ stock
(-100). The following is an example of a synthetic underlying.
Example #2
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
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).\17\
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\17\ Strategy 1 and Strategy 2 may currently be entered and
executed on the Exchange under the Exchange's current rules.
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The Exchange proposes to adopt a complex order instruction in Rule
5.33(b)(5) to codify and further facilitate delta neutral hedging for
all index options listed for trading on the Exchange.\18\ Trading
Permit Holders that transact in index options currently have the
ability to submit for electronic processing complex orders that are
delta neutral, so long as the component ratio conforms to the current
rule for complex orders of one-to-three/three-to-one. Additionally,
Trading Permit Holders have the ability to submit for manual handling
complex orders that are delta neutral in any ratio; however, only those
with a one-to-three/three-to-one ratio are not eligible for complex
order increments or complex order priority.\19\ Specifically, the
Exchange proposes to adopt a definition of an ``Index Combo'' order as
an order to purchase or sell one or more index option series and the
offsetting number of Index Combinations defined by the delta. For
purposes of an Index Combo Order, the Exchange proposes to adopt a
definition of an ``Index Combination'' as a purchase (sale) of an index
option call and sale (purchase) of an index option put with the same
underlying index, expiration date, and strike price. Additionally, the
Exchange proposes to adopt a definition of ``delta'' as the positive
(negative) number of Index Combinations that must be sold (purchased)
to establish a market neutral hedge with one or more series of the same
index option.\20\
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\18\ The Exchange currently lists options on 24 indexes: Dow
Jones Industrial Average (DJX), MSCI EAFE Index (MXEA), MSCI
Emerging Markets Index (MXEF), S&P 100 Index (OEX), Russell 1000
Growth Index (RLG), Russell 1000 Value Index (RLV), Russell 1000
Index (RUI), Russell 2000 Index (RUT), S&P Materials Select Sector
Index (SIXB), S&P Communication Services Select Sector Index (SIXC),
S&P Energy Select Sector Index (SIXE), S&P Industrials Select Sector
Index (SIXI), S&P Financial Select Sector (SIXM), S&P Consumer
Staples Select Sector Index (SIXR), S&P Real Estate Select Sector
Index (SIXRE), S&P Technology Select Sector Index (SIXT), S&P
Utilities Select Sector Index (SIXU), S&P Health Care Select Sector
Index (SIXV), S&P Consumer Discretionary Select Sector Index (SIXY),
S&P 500 Index (SPX), FTSE 100 Index (reduced-value) (UKXM), Cboe
Volatility Index (VIX), Mini-S&P 100 Index (XEO), and Mini-S&P 500
Index (XSP).
\19\ See Rules 5.4(b) and 5.85(b).
\20\ See Rule 5.33(b)(5).
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As noted above, the Exchange lists multiple index options for
trading. MIAX currently only lists options on one index--the SPIKE
Index. The primary basis for MIAX's adoption of a SPIKES Combo Order
was the lack of an
[[Page 945]]
underlying for the SPIKES Index that investors may use for hedging
purposes.\21\ There was nothing about the SPIKES Combo Order specific
to the SPIKES Index itself. While MIAX adopted a combo order for a
single index, all index options, including those the Exchange lists for
trading, lack an underlying that investors may use for hedging
purposes. Therefore, the Exchange believes it is appropriate to offer
investors a combo order for all index options. Additionally, MIAX is an
electronic only exchange, while the Exchange has a trading floor for
open outcry trading. As noted above, Trading Permit Holders may
currently engage in delta neutral hedging for index options
electronically or on the trading floor, subject to certain ratio
restrictions. The Exchange believes all Trading Permit Holders should
be able to use Index Combo orders in the same manner, regardless of
whether they choose to submit them for electronic or open outcry
trading.
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\21\ See Securities Exchange Act Release No. 87199 (October 2,
2019), 84 FR 53786 (October 8, 2019) (SR-MIAX-2019-37).
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The Exchange also proposes to adopt a provision that states an
Index Combo order may not have a ratio greater than eight options to
one Index Combination (8.00). The Exchange proposes to use this ratio
as it is already a defined conforming ratio in the System \22\ used for
stock-option orders, and it will allow the Exchange to implement the
trading of Index 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 Index Combo
orders where the ratio would represent contracts to Index Combinations.
Lastly, the Exchange proposes to add an internal cross reference to
state that Index Combo orders will be subject to all provisions
applicable to complex orders (excluding the one-to-three/three-to-one
ratio) in the Rules.\23\
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\22\ The ``System'' means the Exchange's hybrid trading platform
that integrates electronic and open outcry trading of option
contracts on the Exchange, and includes any connectivity to the
foregoing trading platform that is administered by or on behalf of
the Exchange, such as a communications hub.
\23\ The Exchange makes conforming changes to Rules 1.1
(definition of complex order), 5.4(b), 5.6(c) (definition of complex
order), 5.30(a) and (b), 5.83(b), and 5.85(b).
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Index 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. An Index
Combination 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 one-to-three/
three-to-one to eight-to-one for Index 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 in all
index options.
Below is an example of an index option delta neutral strategy that
provides the investor exposure to the Greeks that may be created under
the Exchange's proposal to allow Index Combo orders to leverage the
eight-to-one ratio afforded stock-option orders.
Example #4
Strategy A: Buy 8 ABC Index May 18 Calls, Sell 1 ABC Index May 15
Calls, and Buy 1 ABC Index May 15 Put (25 times)
Calls: Buy 8 (25) ABC Index May 18 Calls
Combination:
Sell 1 (25) ABC Index May 15 Call
Buy 1 (25) ABC Index May 15 Put
Buy 8 ABC Index May 18 Calls (12.5 Delta)
Sell 1 ABC Index May 15 Call (55 Delta)
Buy 1 ABC Index May 15 Put (45 Delta)
(8 * 12.5) + (-1 * 55) + (1 * -45)
100 - 55 - 45 = 0
Net Position: + 200 ABC Index May 18 Calls -25 ABC Index May 15 Calls +
25 ABC Index 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
Example #4 illustrates a delta neutral position in an index option
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 Index Combo order, which
includes an Index Combination. The Index Combination (sell call, buy
put with the same underlying index, expiration date, and strike price)
creates the synthetic underlying position for the index 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, Index Combinations 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 an Index Combination
and allow Index Combo orders to be treated similarly to stock-option
orders by permitting these orders to leverage the eight-to-one ratio
defined for stock-option orders. The Exchange believes that a ratio
greater than three-to-one, but not greater than eight-to-one, would
allow investors the opportunity to create additional delta neutral
transactions with index options.
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
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\24\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \25\ requirements that the rules of an exchange be
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 regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \26\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ Id.
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In particular, the Exchange believes the proposed rule change
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
[[Page 946]]
and, in general, protects investors and the public interest, by further
facilitating the creation of delta neutral transactions in index
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 Index Combo
orders, with the exception of the one-to-three/three-to-one ratio
limitation.
The proposed eight-to-one ratio for Index 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, another options exchange that offers options on an
index provides for the creation of delta neutral strategies.\27\
Providing investors the ability to create delta neutral transactions
similar to those created on another exchange reduces investor confusion
and in turn strengthens investor confidence in the marketplace by
providing consistency among exchanges.
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\27\ See Miami International Securities Exchange, LLC (``MIAX'')
Rule 518, Interpretation and Policy .07.
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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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe the proposed rule change will impose any burden on intramarket
competition, as it will be applicable to all Trading Permit Holders
equally. Any Trading Permit Holder may trade index options and submit
Index Combo orders, and all Trading Permit Holders can benefit from the
creation of delta neutral transactions as described in this proposal.
The System will handle all Index Combo orders in the same manner. The
Exchange does not believe the proposed rule change will impose any
burden on intermarket competition, because another exchange options
offers the same order type for the index option listed on that
exchange.\28\ The Exchange believes that the proposed rule change will
relieve any burden on, or otherwise promote, competition, because it
will provide index options with similar hedging capabilities currently
afforded stock-option orders. Additionally, providing investors the
ability to create delta neutral transactions similar to those created
on another exchange reduces investor confusion and in turn strengthens
investor confidence in the marketplace by providing consistency among
exchanges.
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\28\ See id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, the proposed rule change
has become effective pursuant to 19(b)(3)(A) of the Act \29\ and Rule
19b-4(f)(6) \30\ thereunder.
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\29\ 15 U.S.C. 78s(b)(3)(A).
\30\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \31\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) under the Act \32\
permits the Commission to designate a shorter time if such action is
consistent with the protection of investors and the public interest.
The Exchange has asked the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. The Exchange states that waiver of the operative delay would
provide investors as soon as possible with similar hedging capabilities
for index options that they have currently for stock-option orders. In
addition, the Exchange notes that the proposal is not novel or unique
because another exchange currently offers the same order type for an
index option it lists for trading.\33\ The Commission finds that it is
consistent with the protection of investors and the public interest to
waive the 30-day operative delay. The Commission believes that the
proposal will benefit investors by permitting additional delta neutral
transactions for index options. The Commission notes that another
options exchange currently permits Combo Orders for options on an
index.\34\ Accordingly, the Commission hereby waives the operative
delay and designates the proposal operative upon filing.\35\
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\31\ 17 CFR 240.19b-4(f)(6).
\32\ 17 CFR 240.19b-4(f)(6)(iii).
\33\ See supra note 21 and MIAX Rule 518, Interpretation and
Policy .07.
\34\ See id.
\35\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or 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-CBOE-2019-126 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-CBOE-2019-126. This file
number should be included on the subject line if email is used. To help
the
[[Page 947]]
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 to make available publicly. All submissions
should refer to File Number SR-CBOE-2019-126 and should be submitted on
or before January 29, 2020.
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\36\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00061 Filed 1-7-20; 8:45 am]
BILLING CODE 8011-01-P
