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Amex to Offer Refunds on Index Options

February 12, 1988|Associated Press

NEW YORK — The American Stock Exchange, in an effort to restore investor confidence, said Thursday that it would refund as much as $1 million to customers who traded stock index options the day after the market crashed.

The move coincides with a similar decision earlier this week by the Chicago Board Options Exchange, the nation's largest stock index options market.

The CBOE said it will supervise a plan to refund up to $2 million to about 200 customers who complained that they were overcharged on index options.

Amex spokesman John Krug said the New York-based exchange had agreed on its price adjustments several weeks ago, although they were announced Thursday.

An option gives a trader the right to buy or sell a security at a fixed price within a specified time. Stock index options are contracts that give the holder the right to buy or sell an instrument based on an index of stocks. They often are used as a hedge against losses in the stock market.

The refunds are aimed at dulling complaints about losses suffered by those who traded index options on Oct. 20, the day after Black Monday.

In the wake of the crash, traders complained that the price of index options gyrated wildly, resulting in unfair losses. Since then, trading in these instruments has fallen considerably.

Trading in the Amex's major market index option has dropped by more than 60%, Krug said, as has the volume of index option trading on the CBOE.

The options exchange said it would not actually refund the money from its treasury, but would raise the funds by charging floor traders in its index options pit a transaction fee.

The Amex refunds will be determined on an individual basis by market makers and their customers, Krug said.

The proposed refunds are small considering the flood of complaints and big losses suffered by options investors. Investors lost hundreds of millions of dollars by trading in stock index options during the crash, according to industry estimates.

Industry experts predicted that the refunds would provide little more than a temporary salve for traders' wounds. They said the pricing procedures that led to the October losses also needed to be reviewed.

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