Exchanges Plan Mini Contracts Amid Record Share Prices
(CHICAGO/NEW YORK CITY) Some major exchanges seeking to feed demand for options after trading reached a ninth straight annual record are asking regulators to approve smaller contracts, concerned the highest stock prices on record make some of them too expensive.
Apple’s 41 percent gain this year to $569.18 means it costs $2,455 to buy a call expiring in June with a strike price of $565, according to data compiled by Bloomberg. Google’s $609.15 share price requires a $1,840 investment for one June contract giving the right to buy 100 shares at $610 each.
The Standard & Poor’s 500 Index (SPX) has rallied 100 percent since March 2009, driving 46 stocks in the measure to at least $100 a share. Equity option volume has slipped 7.7 percent in 2012 from last year and three venues plan to join the existing nine. The smaller contracts, giving the right to buy or sell 10 shares instead of the current 100, are aimed at individuals looking to hedge after the average price of a stock in the S&P 500 climbed to a record $58.52.
To expensive for some retail investors
“For a retail account to buy options on Apple, it becomes a substantial investment,” Andy Nybo, principal and head of derivatives at New York-based Tabb Group LLC, said in a phone interview. “It’s all about attracting order flow and one way to do that is by providing new products that answer investor needs.”
The Securities and Exchange Commission is arranging a meeting with NYSE Arca Options and the International Securities Exchange to discuss terms they’ve proposed on so-called mini- options. TD Ameritrade Holding Corp. (AMTD) and the Securities Industry and Financial Markets Association urged the venues to avoid creating confusion by offering different specifications for similar products.
“The SEC has reached out to us to see if we would be willing to work with them and any other interested exchange to forge a common proposal,” Molly McGregor, a spokeswoman for New York-based ISE, which is owned by Deutsche Boerse AG of Frankfurt, said in an e-mail. She said ISE would support the effort.
NYSE Arca Options will participate in the meeting, said Katrina Clay, a spokeswoman at New York-based NYSE Euronext. John Nester, an SEC spokesman, declined to comment.
Higher prices for stocks and exchange-traded funds such as the SPDR Gold Trust (GLD), which trades for $156, limit the ability of investors who own fewer than 100 shares to use hedging strategies, Christopher Nagy, managing director for order routing and market data strategy at TD Ameritrade, said in an April 30 letter to the SEC. He suggested the SEC reject the proposals from both exchanges and said the venues should work together to agree on a common methodology.
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