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<I>TSC</I> Options Forum: Joining the Club

Listing requirements are welcoming, but the rules governing options trading are becoming more restrictive.

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.

This should not have any impact on long-term investors who simply buy puts to limit the downside risk of a long stock position. But for active traders and the companies that sponsor them (known as proprietary trading firms or prop houses), this could be a major blow as it undercuts one of the more popular trading strategies. (Dave Baker's

column yesterday supplied a detailed explanation of the mechanics behind bullet trading and its effect on daytraders.)

For daytraders and scalpers who look to capture small price changes, such as 5 cents or 10 cents on several thousand shares, married puts were an essential part of their arsenal. It basically allowed them to buy stock, and then buy puts with minimal time premium, and wait for a move. If the shares moved up they'd profit on the long stock. If the stock started to slide they counted on the ability to dump shares at the bid -- not needing to wait for an uptick was crucial -- and profiting on the puts they owned.

The new SEC rule would require a trader to calculate the aggregate position for determining if they are net long or short and whether they must adhere to the short-sale rules. This means someone with a married put would be deemed to have a neutral or essentially nonexistent position, making any sale subject to the current uptick rule.

I think the current uptick rules are already too restrictive and biased -- on a day when the


has screamed up 300 points, why do buyers not have to wait for a downtick to buy? This just adds another layer of obfuscating rules that undermines the concept of transparent markets and open price discovery. Creating more rules that essentially make short-selling illegal is neither smart nor does it benefit the market.

Tell me what you think.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to

Steve Smith.