CBOE rolling out 2.5s????

Discussion in 'Options' started by ktm, Nov 24, 2001.

  1. ktm


    I was reading the other recent thread here on ENE options and thought I'd check out the available contracts. Both CBOE and QCharts are showing a DEC (and beyond) 2.5 contract. Does anyone know if this is a policy shift or just special circumstances. I have never seen a contract below $5. I couldn't find anything on the CBOE site about it.

  2. dottom


    If memory serves, I think CBOE rolled out $2.5 intervals back in 1996. The general rule is as follows:
    <TABLE border=1>
    <TR><TD>Price of Stock</TD><TD>Strike Interval</TD></TR>
    <TR><TD>less than $25</TD><TD>$2.50</TD></TR>
    <TR><TD>$25 to $200</TD><TD>$5</TD></TR>
    <TR><TD>above $200</TD><TD>$10</TD></TR>

    There are exceptions as well. Stock splits resulting in stocks > $25 will often have $2.5 intervals on options to accommodate the split. I've also seen a stock doing 3-for-1 split convert 100 strikes into three 33 1/3 (rounded to 33 5/16). The other thing that will happen is they will change the # of underlying shares that an option contract controls (increase it from 100) such that the math matches a regular strike interval. After a split or merger just download the latest option chain symbols.
  3. ktm


    I understand the INTERVAL is 2.5, it's the actual contract for $2.50 that I'm questioning. ENE hasn't split this year and the open interest on the listed contracts is zero. It looks as if they just rolled them out after the close on Friday.

    I checked a few other heavily traded stocks under $5 and didn't see a $2.50 contract.
  4. dottom


    ktm, ah, I understand what you're saying now.

    The ENE 2.5 strike doesn't show up on my option chains list. Do you have the symbol?

    Maybe when a large volume stock tanks as much as ENE, and there are merger talks, they add the strike as a special case? I'm curious myself. A good friend of mine was an exec at ENE a couple years ago. He held on to all his stock.
  5. ktm


    The chain is EMKLZ. This link should work. I've seen some drastic stuff by big co's that have dropped like stones (under 5) with 10M+ in vol per day, but never a $2.50 contract. I think it's a great thing...I just wonder where it came from...and if I'll ever see another one.

  6. dottom


    Very intersting indeed. Note that the Open Interest is zero. I wonder if they just started trading the 2.5 on Friday?

    If you believe the ENE will not go bankrupt and the merger will occur, there seems to be a lot of potential bullish spread opportunities, including just buying 2.50 or 5.00 call outright.

    There may be some decent spread opportunities with DYN too, I'll have to take a look.
  7. ktm


    I see a bit of volume on Friday...30-40 contracts or so.

    There are some very interesting spread possibilities from here. The December 5 strangle is under 2.50 as well. I would gather this whole thing should be played out before December expiration. There are definitely some opportunities.

    Good Luck.
  8. ktm


    I wound up straddling ENE, taking the 7.50C and 2.50P for .70 total. It looks like the downside will play out as it is now halted at $1.20. I wasn't paying much attention and missed the drop. I'll close the puts out if it reopens today.

    Hope you made some $$$.
  9. dottom


    Not bad the puts were cheap being so low strike. Nice straddle. I was looking at this as an "all-or-nothing" play. Either you believe ENE will survive and merger will go through (go long calls) or you think they will go bankrupt (go long puts).

    It felt like a crapshoot for me so I stayed away. My friend who was former exec at ENE lost a small fortune, I'm sure he'll be talking to the class action lawyers.

    I wonder how many times CBOE has introduced 2.5's to a stock, and how many times that stock has recovered? Maybe a good leading indicator...
  10. ktm


    I've never seen a 2.5 in the years I've been trading.

    I had no idea whether ENE and DYN would pull it off or not. There were so many variables, competing interests and angles that it wasn't worth the time to get all the way into it. I didn't think it would work out as well as it did for me, but I'm glad it happened quickly.

    I will do a bit of research and then likely sink a portion of my profits into the Jan04 $5 Calls. They are selling for .25. I'm thinking ENE will emerge from bruptcy with some valuable assets that will get picked up. Two years is forever in this market.

    If you find any articles or PR notices on the 2.5's, please post here.

    #10     Nov 28, 2001