The Chicago Board Options Exchange (CBOE) today announced plans to begin trading binary options contracts on the S&P 500 Index (SPX) and on the CBOE Volatility Index (VIX). The U.S. Securities and Exchange Commission approved CBOE's rule filing to list binary options on broad-based indexes on May 22, 2008, and trading is scheduled to start on July 1.
Binary options have just two possible outcomes - a payoff of a set amount or nothing at all. CBOE initially will offer binary call options, which will pay either $100 per contract if the underlying index settles at or above the strike price at expiration, or nothing at all if the underlying index settles below the strike price at expiration. In addition, because they are exchange-traded, CBOE binary options have clearing guarantees unavailable in the over-the-counter market.
CBOE binary options offer a number of strategies for users.For example, a hedger typically using a covered write might use a binary option to avoid giving up too much upside. Buyers of binary options might take a position that the underlying broad-based index will settle above a particular level at expiration, while sellers could take a position that the underlying broad-based index will settle below a threshold.
Both buyers and sellers of binary options will know exactly how much can be made or lost if the positions are held to expiration. In addition, binary option spreads may be traded as a way to take a position that the underlying broad-based index will settle inside or outside a range of index levels.
"CBOE's binary options provide a straightforward way for investors to act on their views of two of the most closely followed indexes in the world, the S&P 500 and the CBOE Volatility Index," said CBOE Chairman and CEO William J. Brodsky. "These products will appeal to the broad range of market participants, including individual investors, hedge funds and institutions, who have an opinion, one way or another, on future price movements in SPX or the VIX."
Through May 2008, volume in SPX options rose to nearly 65 million contracts, and VIX options volume totaled more than ten million contracts, both records for the five-month period. CBOE's wholly owned subsidiary, CBOE Futures Exchange (CFE), also lists futures on the VIX, its flagship product, which in May traded almost 115,000 contracts.
The Designated Primary Market Maker (DPM) for binary options on the S&P 500 Index (ticker symbol BSZ) is Chicago Trading Company; the DPM for binary options on the CBOE Volatility Index (ticker symbol BVZ) is Group One Trading, L.P.
Contract Specifications
Identical for both contracts:
-Multiplier:$100
-Listed Contract Months:Initially, three consecutive, near-term contractmonths
-Quotes:In pennies, ranging from 0 to 1.00
-Minimum Tick Size:0.01 points ($1.00)
-Trading Hours:8:30 a.m. to 3:15 p.m. Chicago time
-Position Limits:1,500,000 contracts on the same side of the market
Contracts vary:
-Last Trading Day and Expiration Dates:
-The last trading day for SPX binary options (BSZ) will be the Thursday before the third Friday of the expiration month, and the options will expire on the Saturday following the third Friday of the expiration month.
-The last trading day for VIX binary options (BVZ) will be the Tuesday before the Wednesday that is 30 days prior to the third Friday of the calendar month immediately following the expiring month (e.g., July 15, August 19 and September 16, 2008).The options will expire on the Wednesday that is 30 days prior to the third Friday of the calendar month immediately following the expiration month (e.g., July 16, August 20 and September 17, 2008).
-Strike Price Intervals: For BSZ, minimum interval of one point; for BVZ, minimum interval of five points
-Settlement of Option Exercise:
-For BSZ, the settlement value of the SPX (or "SET") will be used to determine if the binary option is in, at or out of the money.
-For BVZ, the settlement value of the VIX (or "VRO") will be used to determine if the binary option is in, at or out of the money.
CBOE, the largest options marketplace in the U.S. and the creator of listed options, is regulated by the Securities and Exchange Commission (SEC).For additional information about the CBOE and its products, access the CBOE website at: www.cboe.com/.
FTSE Mondo Visione Exchanges Index:
CBOE To Begin Trading Binary Options On S&P 500® Index (SPX<SUP>SM</SUP>) And CBOE Volatility Index® (VIX®)
Date 09/06/2008