CBOE and PHLX Launch SPDRs Options - Trading Today

January 08, 2005

Options on SPDRs have arrived at last - this Monday on the PHLX - amidst a highly pressurized environment in which S&P filed a lawsuit to block unlicensed ISE SPDRs options.

Whether the launches finally resulted from the pressure, or the timing was mere coincidence, SPDRs options have arrived at last, amidst a pressurized environment.  Both the CBOE and the PHLX begin trading SPDRs options today, January 10th, and are launching the options on the SPDRs with Standard & Poors' blessing.  Both the Chicago Board Options Exchange (CBOE) and the Philadelphia Stock Exchange (PHLX) begin trading the options this morning.

The Standard & Poor's Depositary Receipts Trust Series 1 exchange-traded fund (ETF), which trades under the ticker SPY on the American Stock Exchange and is known as the SPDR, is the world's largest ETF by assets, and has long been the only major ETF with no options contracts.

The lack of options on the SPDRs has been widely bemoaned by smaller options users who found it more difficult to access the more pricey options on the S&P 500 Index.  The options have finally arrived amidst a highly charged environment in which McGraw-Hill, owner of Standard & Poors, filed a lawsuit against the International Securities Exchange (ISE) and successfully obtained a temporary injunction blocking the launch of the unlicensed ISE options.

"The SPDRs options will become the most actively traded equity derivatives in history," said Dan Carrigan, Vice President of New Products at the Philadelphia exchange, reached in the office this Saturday. Carrigan also noted that "This should be the biggest financial product launch in many, many years.

This claim really should come as no surprise.  Investors have been clamoring for options on the SPDRs for years.  And the options on the world's second largest ETF, the QQQQ are among the most active in the world.  Carrigan noted that the higher price point of SPY (about $118 as opposed to the $38 of QQQQ) make the volatility appeal of the product all that much greater as well, because when a share of SPY moves 10%, that is a $12 move of the stock, as opposed to a $4 move of an ETF like QQQQ.

Standard & Poor's and the CBOE had come under increasing pressure to launch SPDRs options.  It was widely believed that the CBOE simply wasn't interested in launching the ETF options, as the exchange has enjoyed a very successful franchise of options based on the S&P 500 index itself (SPX).  The options on SPY will allow investors to in effect access options on the S&P 500 at a much lower price - at about 1/10th the price of current options on the index…which currently trade at a strike price of around $1,200 depending on the option.

The CBOE announced that it had selected Chicago Trading Company as the designated primary market maker to trade the SPDRs options.  The CBOE, which initially did not annouce a launch date, quickly launched the options today, and so wasn't beat to the market by the PHLX.  The CBOE itself noted that the price of the SPDR is approximately 1/10th that of the S&P 500 index.  SPDRs call and put options have an underlying value of 100 SPDRs. So, for example, if the SPDR is priced at 120, the underlying notional value covered by one SPDR option would be $12,000, as opposed to the $120,000 notional value of an SPX option.  The CBOE would seem to be an appropriate listing venue for options based on the world's largest ETF by assets, as the CBOE is the world's largest options exchange.

The Philadelphia Stock Exchange did provide a launch date for the SPDRs options in its initial announcement.  The options on the PHLX began trading today, January 10th.  Options on SPDRs will trade on PHLX XL, the Exchange's electronic trading platform, along with 19 other PHLX proprietary indexes.

"PHLX is excited to partner with S&P to bring SPDR options to the global investing and trading community," said the PHLX's Carrigan.  "SPDR Options will trade on the March cycle with two front months and Leaps for 2006 and 2007.  Strike prices will be every Dollar from 88 to 148.  All contracts will be cleared by The Options Clearing Corporation," added Carrigan. Susquehanna International Group is the specialist.

The Philadelphia has long been an innovator in the index space and has been active in the index space in the past year.  It was recently profiled in a news feature on this site.

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