Introduction to CBOE Credit Option Complex
The credit derivatives universe is a massive market space with enormous potential. It is the fastest growing segment of the OTC market and recent reports have calculated the notional volume in the OTC credit derivatives market at more than 60 trillion dollars. There are inherent advantages that our listed market can provide, such as transparency, anonymity, standardized contract terms, central clearing and settlement, and the option of floor-based or electronic trading in a securities exchange regulated environment.
Significantly, CBOE views credit derivatives as a natural extension of our equity options business. Equity options premiums reflect changes to the credit ratings of the underlying security. For example, put values should increase on concerns that the underlying entity will declare bankruptcy. In practice, there currently exist numerous institutions that trade equity options versus credit derivative products. Our new product line will enable these traders and many others to access equity options and credit options through the same channels.
More specifically, the first credit derivative products we are launching are "Credit Event Binary Options", or "CEBOs". These are options that pay cash amounts in the case of credit events. We are listing Single-Name CEBOs and Basket CEBOs.
Additional Links:
View Archived Webcast on CEBOs
Cookbook of CBOE Credit Event Binary Options (CEBO)
Single-Name and Basket Options
Swiss Derivative Review Article
Press Release - June 7, 2007
Press Release - March 14, 2007
Single-Name CEBOs
On Tuesday, June 19, 2007 CBOE launched Single-Name CEBOs on individual companies. These are also known as "Credit Default Options".
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Company Name
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Equity
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Expiration: Sept. 2012
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CEBO Option Root
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Month & Strike Codes
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General Motors Corp
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GM
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GCY
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IZ
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Ford Motor Co
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F
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FDW
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IZ
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Hovnanian Enterprises Inc
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HOV
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CKJ
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IZ
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Standard Pacific Corp
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SPF
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JSW
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IZ
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Single-Name CEBOs are security options that pay a fixed amount—$100,000 per contract—in the case where a credit event on an individual issuer or guarantor of debt securities is declared prior to the option's expiration. If there is no credit event declared before expiration, the option pays nothing.
Additional Links:
Single-Name CEBO Information Circular
Basket CEBOs
On August 28, 2007, CBOE launched Basket CEBOs. These are also known as "Credit Default Basket Options".
Basket CEBOs are call options based on a basket of reference entities (the basket components). The options automatically pay out a cash amount each time a credit event is confirmed in any of the basket components during the life of the contract. CBOE will determine when a triggering credit event has occurred, and resolution and payout is pre-determined and binding. Initially, CBOE is listing three such contracts.
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Basket Name
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Expiration: Sept. 2008
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Expiration: Sept. 2012
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CEBO Option Root
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Month & Strike Codes
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CEBO Option Root
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Month & Strike Codes
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Auto Sector
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AFY
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IZ
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AFZ
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IZ
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Homebuilder Sector
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BBR
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IZ
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BBS
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IZ
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High-Yield Composite
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HAU
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IZ
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HEU
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IZ
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After a payout, the basket component that had a credit event will be removed from the contract and the contract will continue on with one less entity in the basket. Subsequent payouts occur upon confirmation of credit events in the remaining components. The contracts will continue to trade until expiration or until all of the entities in the basket have confirmed credit events. If no credit event is confirmed in any basket component prior to expiration, the option will expire worthless.
The payout amount for any basket component is a percentage of the notional face value, based on the weight of the component that experienced the event and its specified recovery rate. (For example: notional face value x component weight x (1-recovery rate) or $100,000 x .1 x (1 - 40%) = $6,000).
Additional Links:
Press Release - August 27, 2007
Press Release - July 25, 2007
IC07-109 New Product Launch - Basket Credit Event Binary Options