UPDATE 3-CBOE third-quarter profits fall 48 pct

*CBOE Q3 net income drops 48 pct to $19.2 million

*Q3 revenues decline 17 pct to $98.4 million

*Q3 expenses jump 11 percent to $65.6 million

*Q3 trading volume is down 16 pct (Recasts, adds analyst's comment in paragraphs 4-5, byline)

By Doris Frankel

CHICAGO, Oct 28 (Reuters) The Chicago Board Options Exchange on Wednesday reported a 48 percent drop in quarterly profit, hurt by a slump in trading volume and higher expenses.

The largest U.S. options exchange said net income for the third quarter fell to $19.2 million from $36.7 million a year earlier. Before taxes, it earned a profit of $32.8 million, compared with $58.5 million a year ago.

Revenue in the three months ending Sept. 30 fell 17 percent to $98.4 million, impacted by lower trading volume and a shift in the trading mix, CBOE said.

"This was a very weak quarter for CBOE," said Diego Perfumo, an analyst at Equity Research Desk, in Greenwich, Connecticut.

"The decline in earnings was driven by lower industry volume, higher trading incentive expenses to protect market share and the shift in product mix from CBOE's exclusive index options to options on exchange-traded funds which are charged a lower fee," he said.

Revenue and net income dropped year over year in part because of last year's financial crisis.

CBOE options trading volume surged to a record amid the turmoil in the third quarter of 2008 as investors rushed to protect portfolios when stock market volatility surged.

The results reflect a challenging market recovery, making comparisons difficult with a record-setting third quarter in 2008, "when extraordinary market events resulted in record options trading volume," the CBOE said in a statement.

Chairman and Chief Executive William Brodsky said CBOE remains focused on long-term strategic goals, including new products and trading platform innovation.

CBOE aims to launch an alternative electronic options platform called C2 in early 2010 to attract new customers.

The new exchange would complement CBOE's hybrid platform that features both electronic and open outcry trade.

For nearly three years, CBOE has also embarked on a path to demutualize its membership organization into a for-profit shareholder company. The exchange awaits a resolution in a long legal battle over ownership rights to complete its conversion plan.

During the quarter, trading volume at CBOE fell 16 percent to 286.9 million contracts from 341.8 million a year ago.

The average transaction fee per contract was $0.265 for the quarter, down from $0.288 a year ago. The decrease reflects a shift in the volume mix, with a lower percentage of volume coming from higher-margin product categories, CBOE said.

The decline also took into account CBOE waiving fees for some transactions in order to be competitive due to fee changes within the options industry.

Expenses jumped 11 percent to $65.6 million from $59.3 million a year earlier, mainly due to higher trading volume incentives, employee costs and outside services, which were partially offset by a drop in royalty fees, CBOE said.

CBOE's operating margin for the quarter -- income before taxes as a percentage of total revenues -- fell to 33.3 percent from 49.7 percent a year earlier, driven by a lower revenue base and higher expenses. (Reporting by Doris Frankel)