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Welcome to your source for answers to questions about option concepts, strategies, and terminology. A new question and answer is published each week. To view the Ask the Institute archives, click the "Ask the Institute Archive" link below.

Please note, questions WILL NOT be personally answered and may not be chosen for publication on the web site.

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This week's question:

DATE: August 18, 2008

QUESTION:
How does the CBOE determine what the strike increments will be?I know strikes usually increment in $2.50 or $5.00, how is that determined?Are their price thresholds that determine this?

ANSWER:
Under CBOE rules, strike price increments are 2.50 for stocks below $25, 5.00 for stocks from $25 to $200 and 10.00 for stocks above $200.

The increase in computer power (band width) and the increase in low-priced and actively traded stocks has brought about changes.Certain actively traded stocks can have strike prices in $1 increments up to $20 and in 2.50 increments up to $50.

New strike prices are added when a stock trades within 2% of the highest or lowest strike price.For example, if 100 is the highest strike, then the 105 strike is added when the stock trades at 98.The only exception is that front-month strikes are not added after the first trading of the expiration month.

Strike price increments for options on indexes (such as SPX, OEX, DJX, MNX, etc.) are subject to other rules, which vary depending on the index level, the volume of trading and the historical practice.New strikes can be added when an index trades within 15% of the highest or lowest strike.Also, new strikes can be added five days before expiration.



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