An option that pays on a metric, not a price

The Securities and Exchange Commission on Tuesday approved a rule change allowing Cboe Exchange to list binary options whose payout depends on a figure a company reports, rather than on its share price, according to the Commission's order. Each contract pays $1 if an issuer's reported number, such as quarterly revenue or a user count, meets or exceeds a strike level set in advance, and nothing otherwise. The SEC approved the proposal on an accelerated basis, on the day it had set as its deadline to act.

The order describes the products as European-style, cash-settled options. Settlement turns on a specific metric that the issuer discloses in an earnings-related filing with the Commission, not on where the stock trades. Cboe's rule text lists the eligible companies and metrics; the companies include Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, Tesla, Netflix, Disney, JPMorgan, Coinbase and Robinhood. Examples of eligible metrics include Nvidia's data centre revenue, Tesla's Model 3/Y production and Meta's family daily active people.

Cboe filed the proposal on 30 June and amended it on 1 October; the amendment replaced the original filing in its entirety, the order says. The order records letters from several commenters, including prediction-market operator Kalshi, Paradigm Operations, Rothera Exchange and Clearing, Thesis Market and Robinhood. Some argued that the Commission should wait until a clearing agency had been approved and changes to options price-reporting and FINRA rules were in place. The Commission replied that an exchange's implementation of an approved rule is a separate matter from the approval itself. Trading has not begun: the order says the contracts will clear through Cboe Clear U.S. (CCUS), subject to approval of its application for temporary registration as a clearing agency, which we reported on last month. No start date is given.

The central question was classification. Cboe's case, which the Commission accepted, is that a contract paying on an issuer's reported figure is an option on a security rather than a swap. The order reasons that the metrics appear in filings with the SEC because they are material to investors valuing the stock, and that each contract's price is expected to move in relation to the value of the issuer's shares. One commenter argued that, unlike binary options already trading, these do not settle on the price or value of a security, the order notes; another said a pending joint SEC and CFTC request for comment on the definitions of swap and security-based swap should delay approval. The Commission approved the proposal regardless.

The order limits its own reach. It says it does not address similar products on the same metrics structured differently. Chairman Paul Atkins's statement says the approval "does not address—and does not foreclose—CFTC jurisdiction" over contracts on the same metrics structured to fall under that agency. Atkins wrote that jurisdictional "turf wars" between the two agencies had frustrated innovation for decades, and that the order "reflects a new spirit of harmonization, innovation, and investor choice". His statement describes the options as standardised, subject to the securities laws and to exchange rules on customer accounts, margin, halts, auctions and market-maker obligations.

The investor protections are those of the existing options market. Per the order, the contracts are fully funded, which by our reading means a buyer cannot lose more than the premium paid. At launch they will trade electronically and in complex orders only, with no FLEX or floor trading. Cboe set a position limit of 25,000 standard contracts per expiration, counting 100 binary contracts as one standard contract. By our arithmetic, that is up to 2.5 million binary contracts, or $2.5m of payout at $1 each. That is a limit in contracts, not a measure of anyone's exposure. The limit for ordinary options on the same issuers is ten times higher, at 250,000 contracts, according to Cboe's filing.

The approval also draws a line between the SEC and the CFTC over event-style contracts. The CFTC on 9 October proposed adding sports, political and other event contracts to its definition of a swap, as we reported. The SEC's order puts contracts that settle on a company's own filings on the securities side. Kalshi, which filed comments, is among the firms seeking to list perpetual futures on individual stocks, as Komposite reported. How the two agencies' definitions interact remains open, and the order says it decides only the contracts before it.

For investors, the practical change is that the earnings report becomes the settlement event rather than only a catalyst for the share price. Insider trading is the obvious pressure point. Cboe says it will work with FINRA to update insider-trading surveillance for the products' features, and the order cites the securities laws' insider-trading prohibitions as one reason the classification fits. Whether the contracts attract meaningful volume will show in open interest once trading starts. As we reported on the sports side, the courts have not settled where the line falls.