Review of Early 2009 SEC Approved Rule Changes Impacting Exchange Traded Equity Options and Possible Implications

20 Pages Posted: 16 May 2009

Date Written: May 16, 2009

Abstract

In early 2009, the SEC approved a series of rule changes impacting the market for equity options, and this paper reviews these changes. In particular, the $3 threshold level associated with continued optionability and the listing of new option series was eliminated. The rule changes allow each option exchange to expand from 10 to 55 the number of stocks selected for inclusion in the $1 Strike Program. Additionally, the lower bound of permissible $1 strike price was reduced from $3 to $1. On March 20, 2009, the T($1) and U($2) strike codes were introduced when American International Group and Citigroup were assigned these codes. This study updates the strike price grid to include these rule changes. Implications associated with these rule changes are identified and include the following: (1) increased trading volume and open interest for equity options; (2) an increase in observed clustering on option strike prices; and (3) the removal of an important incentive for firms contemplating a reverse stock split.

Keywords: Equity Options, SEC Rule Changes, Strike Price Grid, Option Clustering

JEL Classification: G13

Suggested Citation

Maberly, Edwin D. and Pierce, Raylene Marie, Review of Early 2009 SEC Approved Rule Changes Impacting Exchange Traded Equity Options and Possible Implications (May 16, 2009). Available at SSRN: https://ssrn.com/abstract=1405682 or http://dx.doi.org/10.2139/ssrn.1405682

Edwin D. Maberly (Contact Author)

Monash University ( email )

Clayton Campus
Wellington Road
Clayton, VIC 3800
Australia
61399055178 (Phone)

Raylene Marie Pierce

Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

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