CBOE will expand ways to bet on credit defaults

CHICAGO, April 25, 2011 -The Chicago Board Options Exchange (CBOE) announced today that on Tuesday, April 26, the Exchange will continue its roll-out of Credit Event Binary Options (CEBO®) with the addition of five new options classes based on financial firms: Bank of America Corporation (Ticker: BACD); JPMorgan Chase & Co. (Ticker: JPMD); Citigroup Inc. (Ticker: CITD); The Goldman Sachs Group (Ticker: GSSD); and Morgan Stanley (Ticker: MSTD).

CBOE re-launched newly-designed Credit Event Binary Options at the beginning of March with 10 initial single-name listings (http://www.cboe.com/micro/credit/AvailableCebos.aspx). Since then, there has been demand from market participants for a mechanism to protect against potential downside risk in the event of default by broker dealers.

Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (e.g., bankruptcy). Due to inverse correlations between credit and equity markets, CEBO contracts can be used as a hedging tool for individual issuers. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.

A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur.

Contract specifications for CEBOs, which first began trading in 2007, were revised this year. One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout. The size of the CEBO contract payout if a credit event occurs has also been revised. If a bankruptcy occurs prior to expiration of the specific contract, the amount of the payout will be $1,000 per contract.

For the five new classes that will be added tomorrow, initial series expirations will be December 2011, December 2012 and December 2013.

For contract specifications and other information about CEBOs, see www.cboe.com/credit.

comments powered by Disqus