A bit of industry news Tuesday as the Chicago Board of Options Exchange (CBOE) has finally come to settlement with the CBOT (the battle has gone on too long and is too convoluted to rehash), clearing the way for the world’s largest option exchange to demutualize, which is the necessary precursor to an Initial Public Offering. In one sense the delay has benefited the CBOE as it will step into a more stable financial environment in which other exchanges are once again looking at expanding to gain market share.
The CBOE would be an attractive target for an overseas exchange looking for exposure to the high growth U.S. derivatives market which has shown average annual volume growth of 30% over the past six years. The NYSE (NYX) might be interested as a way to counter the Nasdaq’s (NDAQ) move of opening its own option exchange two years ago which allows it to offer combination orders involving Nasdaq listed stocks, such as covered calls, to remain internalized on its own exchange. The CME Group (CME) is a possiblity just due to its sheer size and geographic proximity. But given the bad blood (the CME bought the CBOT which was the parent of the CBOE… again it’s a long sordid tale), I don’t think they will be getting back in bed together.
The last sale of a CBOE seat was on 11/05 priced at $2.7 million. This is slightly off from the $2.9 million high set in 2008 but still double from two years ago and a ten-fold increase from the 2003 nadir. Current estimates place a valuation of around $4-$5 billion for the CBOE, which would translate into $3.5 to $4 million per seat. So if you are looking for a trade with 35% to 48% upside get in there and buy some CBOE seats. The risks include another bear market, increased regulation and slowdown in option volume growth.
Some of the nation's leading grocery retail chains were seeing notable bullish option activity Tuesday morning. Stocks such as Kroger (KR), Safeway (SWY) and Supervalu (SVU) have had really nice runs, gaining an average of 20% during September and October when investors were looking for defensive names that represented value. They have since pulled back from their highs with SVU underperforming by losing nearly 17% in the past three weeks.
Tuesday mornin, Supervalu shares were up 30c to $14.20 and option volume was 6x the daily average. Notable trade risk/reversal in which the April $12.50 puts were sold 3,000 times at 70c and the April $15 calls were purchases 2,400 times at 90c a contract. Shares of the grocer had a gap lower opening Monday which was yet to be filled despite Tuesday morning’s gains. The company is scheduled to hold a conference call today at 2:00 PM, and earnings are not slated until the second week of January.
In Kroger and Safeway, strategists took a more straightforward approach and purchased front month (December) calls out right. In both cases the volume was around 2,500 contracts, which exceeded the strike’s prior open interest.