Credit Options Product Specifications

CBOE Single-Name Credit Event Binary Options

Introducing Single-Name Credit Event Binary Options (Single-Name CEBOs ) from CBOE, Options that bring transparency to the credit derivatives marketplace.

Contract Description:

CBOE Single-Name Credit Event Binary Options (Single-Name CEBOs) are binary call options that pay $1,000 upon the confirmation of a Credit Event in a Reference Entity and $0 if there is no Credit Event prior to the last trading day. Reference Entities are issuers with securities listed on a U.S. national market. For Single-Name CEBOs, a Reference Entity is said to have a "Credit Event" if the following event occurs between the listing date and the last trading day:

Generally, the occurrence of a bankruptcy (Event of Default) of the Reference Entity. The Event of Default will be specified by the Exchange and defined in accordance with the terms of the Relevant Obligation(s). The Exchange may also designate a failure-to-pay default and/or a restructuring as Credit Events.

Each CBOE Single-Name Credit Event Binary Option class shall specify (a) the Reference Entity, (b) the specific debt security that serves as the Reference Obligation, and (c) the applicable Credit Event(s).

Relevant Securities:
The Reference Obligation of the Reference Entity and all its other debt security obligations, excluding non-recourse debt.

Strike Price:
Not applicable.

Exercise Settlement Value:
$1 per unit (equivalent to $2.00 minus the dummy strike price of $1.00) if a Credit Event is confirmed.

Unit/Multiplier:
1,000 per contract.

Cash Settlement Amount:
$1,000 per contract (equal to the exercise settlement value of $1 multiplied by the contract multiplier of 1,000) if there is a Credit Event confirmed; $0 if there is no Credit Event confirmed.

Minimum Price Increment:
$0.01 per unit ($10.00 per contract)

Contract Months:
The Exchange usually will list one to quarterly expiration months for up to 10.25 years. Unless a Credit Event has been confirmed, the last trading day in the series will be the 3rd Friday in the March, June, September or December expiration month (however, if that day is not a business day, the last trading day in the series will be on the preceding business day).

Special Contingencies:
Special procedures will apply if one or more of the following events occur on or before the last trading day:

(1) A Succession Event, which will be defined in accordance with the terms of the Relevant Obligation(s).

Adjustment for Succession: Once CBOE has confirmed a Succession Event, each CBOE Single-Name Credit Event Binary Option contract will be replaced by one or more Single-Name Credit Event Binary Options derived from Successor Reference Entities that have succeeded the original Reference Entity as a result of the Succession based on the share of each Successor Reference Entity (as further described in Rule 29.4). If CBOE determines that a Credit Event in the underlying Relevant Obligation(s) of the Successor Reference Entity has occurred prior to 10:59 p.m. (CT) on the last trading day, the cash settlement amount will be $1.00 multiplied by the applicable successor share. Otherwise the cash settlement amount will be $0.

(2) A Redemption Event, which will be defined in accordance with the terms of the Relevant Obligation(s) and will include the redemption or maturity of the Reference Obligation and of all other Relevant Obligations. (If the Reference Obligation is redeemed or matures but other Relevant Obligation(s) remain, a new Reference Obligation will be specified from among the remaining Relevant Obligation(s) and the substitution will not be deemed a Redemption Event.)

Adjustment for Redemption: Once CBOE has confirmed a Redemption Event, each Single-Name Credit Event Binary Option contract will be settled early at a price of $0 if no Credit Event has been confirmed to have occurred prior to the Redemption Date. If a Credit Event in the underlying Reference Entity has been confirmed to have occurred prior to the Redemption Date, the cash settlement amount will be $1.00.

Confirmation Of Credit Event And Special Contingencies:
CBOE will confirm Credit Events and Special Contingencies based on at least two of the following sources of publicly available information: (1) Wall Street Journal, Bloomberg Service, Reuters, Dow Jones News Wire, Financial Times, New York Times; and/or (2) information submitted to or filed with the courts, the SEC, an exchange or association, the OCC, or another regulatory agency or similar authority.

Every determination made by the Exchange shall be within its sole discretion and shall be conclusive and binding on all investors and not subject to review.

The confirmation period will begin when the Single-Name Credit Event Binary Option contract is listed and will extend to 3:00 p.m. (CT) on the expiration date.

Settlement:
CBOE Single-Name Credit Event Binary Options settle in cash. If CBOE determines that a Credit Event in the underlying Reference Entity has occurred prior to 10:59 p.m. (CT) on the last trading day, the cash settlement amount will be $1. Otherwise the cash settlement amount will be $0.

Last Trading Day:
The 3rd Friday of the expiration month (or, if that day is not a business day, the preceding business day); provided, however, if a Credit Event is confirmed prior to that day, the series will cease trading at the time of confirmation of the Credit Event and the last trading day would be accelerated to the confirmation date.

Expiration Date:
The 4th business day after the 3rd Friday of the expiration month (or, if that day is not a business day, the 4th business day after the preceding business day); provided, however, if a Credit Event is confirmed by the Exchange to members and the OCC, the expiration date will be accelerated to the 2nd business day immediately following the confirmation date.

Final Settlement Date:
The date following the expiration date.

Trading Hours:
8:30 a.m. - 3:00 p.m. (CT)

Trading Platform:
CBOEdirect

Position Limit:
500,000 contracts

Margin:
As described in Rule 12.3(l).

Basket Credit Event Binary Options

Description of Basket Underlying Contract:

Basket Credit Event Binary Options (Basket CEBOs), also known as Credit Default Basket Options, are cash-settled call options based on a Basket of Reference Entities ("Basket Components"). The options automatically pay out a cash settlement amount upon the confirmation of a Credit Event in one, some or all of the Basket Components, as specified by the Exchange at listing. The cash settlement amount could be different for different Basket Components. The Credit Default Basket can be reconstituted periodically and new option series based on the reconstituted Credit Default Basket can be listed as new option classes. Existing options based on the original Credit Default Basket will continue to trade until expiration.

The following will be specified at the time a Basket CEBO contract is listed:

  • the Notional Face Value of Basket (e.g., $1,000),
  • the Basket Components,
  • the weight of each Basket Component, which represents the fraction of the Notional Face Value of the Basket allocated to each Basket Component. (For example, if the Notional Face Value of Basket is $1,000, and there are 10 equally weighted Basket Components, each Basket Component has a Notional Face Value of $100).
  • the recovery rate of each Basket Component,
  • the specified debt security that defines the Reference Obligation of each Basket Component (e.g., Corporation XYZ 8.375% July 2033 bond), and
  • the applicable Credit Event(s).

Basket Components will remain fixed from the time of listing to the expiration date of the option, except that Basket Components could be replaced by Successor Basket Components following a Succession Event and would be removed from the Credit Default Basket after a Credit Event or Redemption Event is confirmed by the Exchange.

Definition Of "Credit Event":
For each Basket Component, a "Credit Event" will occur when the following event occurs in a component between the listing date and the last trading day:

Generally, the occurrence of a bankruptcy (Event of Default) of the Reference Entity Basket Component, with each such Event of Default being specified by the Exchange and defined in accordance with the terms of the Relevant Obligation(s). The Exchange may also designate a failure-to-pay default and/or a restructuring as Credit Events.

Relevant Securities:
The specified debt security that defines the Reference Obligation of each Basket Component and all its other debt security obligations.

Strike Price:
Not applicable.

Cash Settlement:
Basket CEBOs automatically pay a cash settlement amount upon the confirmation of each Credit Event until the scheduled last day of trading. A cash settlement amount would only be paid once per Credit Event confirmed in a Basket Component, after which time it would be removed from the Credit Default Index. If a Credit Event is confirmed in every Basket Component prior to expiration, the option will cease to trade, or if no Credit Event is confirmed in any Basket Component prior to expiration, the option will expire worthless.

Cash Settlement Amount:
If the Exchange confirms a Credit Event in an Basket Component prior to 10:59 p.m. (CT) on the last trading day, the cash settlement amount will be equal to the Notional Face Value of the Basket Component times one minus its Recovery Rate. For example, if the Notional Face Value of the Basket Component is $100, and the Exchange specifies a recovery rate of 40% (or 0.40) for the particular Basket Component in which a Credit Event is confirmed, the cash settlement amount is $60 = $100 * (1 - 0.40).

Basket CEBOs automatically pay holders a cash settlement amount for each Basket Component that has a confirmed Credit Event.

Unit/Multiplier:
1,000 per contract.

Exercise Settlement Value:
The automatic payout will be equal to the cash settlement amount divided by the contract multiplier specified by the Exchange. The maximum Exercise Settlement Value (if a Credit Event occurs in all basket components) is $1.00.

Minimum Price Increment:
$0.01 per unit

Contract Months:
The Exchange usually will list one to quarterly expiration months for up to 10.25 years. Unless a Credit Event has been confirmed, the last trading day in the series will be the 3rd Friday of the expiration month in the March, June, September or December expiration month (however, if that day is not a business day, the last trading day in the series will be on the preceding business day).

Special Ccontingencies:
Special procedures will apply if one or more of the following events occur on or before the last trading day:

(1) A Succession Event, which will be defined in accordance with the terms of the Relevant Obligation(s).

Adjustment for Succession: Once the Exchange has confirmed a Succession Event in an Basket Component, that component may be replaced by one or more Basket Components ("Successor Basket Components") consisting of the Successor Reference Entity(ies), as determined in accordance with Rule 29.4.

For each Successor Basket Component, the Exchange will specify the Reference Obligation (e.g., XYW 8.375% December 2033 bond), recovery rate and the Basket weight of each Successor Basket Component. The sum of the weights of the Successor Basket Components will equal the weight of the Basket Component replaced by the Successor Basket Components.

(2) A Redemption Event, which will be defined in accordance with the terms of the Relevant Obligation(s) and will include the redemption of the Reference Obligation and of all other Relevant Obligations. If the Reference Obligation is redeemed or matures but other Relevant Obligation(s) remain, a new Reference Obligation will be specified from among the remaining Relevant Obligation(s) and the substitution will not deemed a Redemption Event.

Adjustment for Redemption: Once the Exchange has confirmed a Redemption Event in a Basket Component, that Basket Component will be removed from the Credit Default Index.

Confirmation Of Credit Event And Special Contingencies
The Exchange will confirm Credit Events and Special Contingencies based on at least two of the following sources of publicly available information: (1) announcements published by newswire services or information services companies, the names of which will be announced to the membership via Regulatory Circular; and/or (2) information submitted to or filed with the courts, the SEC, an exchange or association, the OCC, or another regulatory agency or similar authority.

Every determination made by the Exchange shall be within its sole discretion and shall be conclusive and binding on all investors and not subject to review.

The confirmation period will begin when the Basket CEBO contract is listed and will extend to 3:00 p.m. (CT) on the expiration date.

Last Trading Day:
The 3rd Friday of the expiration month (or, if that day is not a business day, the preceding business day); however, if a Credit Event has been confirmed prior to that date in every Basket Component, or if a Redemption Event has been confirmed in the last Basket Component prior to that day, the series will cease trading at the time of the confirmation and the last trading will be changed to the confirmation date.

Expiration Date:
The 4th business day after the 3rd Friday of the expiration month (or, if that day is not a business day, the 4th business day after the preceding business day); provided, however, if a Credit Event is confirmed by the Exchange to members and the OCC, the Expiration Date will be accelerated to the 2nd business day immediately following the confirmation date.

Final Settlement Date:
The date following the expiration date.

Trading Hours:
8:30 a.m. - 3:00 p.m. (CT)

Trading Platform:
CBOEdirect

Position Limit:
5,000,000 contracts

Margin:
As described in Rule 12.3(l).

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