The Chicago Board Options Exchange (CBOE) has submitted a rule filing with the Securities and Exchange Commission (SEC) to begin trading binary options on broad-based indexes.
CBOE initially plans to list binary options on the S&P 500 Index and, in the future, on other broad-based indexes, including the Dow Jones Industrial Average. The anticipated launch date is 24 June 2008.
With binary options, there are only two possible outcomes a payoff of a set amount or nothing at all. CBOE binary options contracts, on which calls will be listed first, pay either a fixed cash settlement amount 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. The cash settlement amount either $1,000 or $10,000 per contract will vary depending on the contract.
“Because of their simple all-or-nothing settlement, binary options are extremely straight forward when compared to traditional options contracts. By combining their simplicity with the strength and reach of CBOEs index products, we offer another tool for investors who have a particular viewpoint on a broad segment of the market. We are delighted to be the first US securities exchange to offer binary options,” says William J. Brodsky, chairman and CEO, CBOE.
In the past, binary options predominantly have been part of the over-the-counter (OTC) market. Thus, their introduction to the exchange-traded market offers regulatory safeguards and clearing guarantees unavailable in the OTC space.
CBOE binary options will be quoted in dollars and cents per contract, ranging from zero to 100. Binary options will have European-style exercise, e.g., options can be exercised only on the last business day prior to expiration. Initial plans call for contracts to expand out three months. However, it should be noted that contract specifications are subject to change until SEC approval is received.
When approved, these products will offer a variety of strategies to a broad group of 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.