TSC Options Forum: Joining the Club

Steve, I like this little company and want to sell some puts on it. However, no options are available on it. What are the requirements to have options established on a company? Who decides? What are the requirements?

Thanks,

-- T.G.

While all five option exchanges reserve the right to accept or reject the approval of listing options on a given security, there are some basic requirements to which all adhere. Here are the guidelines recommended by the Securities and Exchange Commission:

• the underlying security should have a public float (this excludes shares held by officers and shareholders controlling more than 10% of the outstanding shares) of 7 million shares,

• there should be at least 2,000 holders of the underlying security,

• shares of the underlying have traded a minimum of 2.4 million shares during the 12 months' preceding listing, and

• the price of the underlying has traded above $7.50 for a majority of days [above 50%] during the three months' preceding listing.

Don't Do What We All Won't Do

But given the competitive nature of the options business, these guidelines are not hard and fast rules, and the ubiquitous nature of dual listings and electronic linkage, most exchanges reserve the right to "list options on any underlying security that trade on at least one other registered national securities exchange," according to the American Stock Exchange specification requirements.

With recent revelations regarding practices of certain exchanges, and the effectiveness of self-regulation coming under suspicion, this confirms that "competition among exchanges helps maintain the quality listings and prevents one exchange from bending the rules to garner business or gain a market share advantage," said a spokesman at the Chicago Board of Options Exchange.

I agree that linkage and the current environment will prevent suspect companies from being able to list options and thus helps pre-empt any nefarious trading activity in some fly-by-night company. But there are currently no clear rules for the delisting of options trading on issues that can prove to be a black hole for investors. Once a company's stock falls below the trading threshold, the options can continue to trade until their expiration date.

Out of Bullets

Steve, I sometimes buy puts to protect my gains, especially as this market has gone up. But I saw something you wrote about the SEC making married puts illegal. Can you explain?

Thanks,

-- J.G.

A married put involves the simultaneous purchase of stock and puts on the underlying shares. On Tuesday, the Securities and Exchange Commission issued a release on guidelines that could restrict the use of married puts. The SEC's concern is that some people (particularly hedge funds and daytraders) have been using the strategy, also known as bullets, as a way to circumvent short-sale rules, which requires an uptick in the stock price before one can sell shares short.