Mini Options

ISE To Launch Mini Options Trading - March 18, 2013

A New Cog-In-The-Wheel Of Success And Profit!

Small Investors To Profit From Mini-Options!

Expensive Stocks Played With Cheap Options!

by Ian Harvey

March 07, 2013

Introduction

The option industry has grown significantly popular in recent years, as the investor has developed an understanding and desire to utilize options to leverage underlying stocks moves and/or to hedge their own portfolios.

Also, there have been several welcome changes. In the past, you were only able to use options with strike prices every $5, or at times even $10. Eventually, spreads reduced down to $2.50 and now many large stocks have strikes at a dollar apart from each other. The introduction of “Weekly Options” on big-name stocks gives you more expirations a month to play with.

One problem that is encountered is that a stock's appreciation becomes more expensive for the casual investor to continue investing as the price increases, even when using options as the investment vehicle.

Now, the latest innovation is the Mini Option, which will permit investors to trade options on 10-share lots rather than the customary 100 shares. This development is a great cog-in-the-wheel of success and profit for the investor!

On March 23rd, 2012 and April 9th, 2012, NYSE Arca and the International Stock Exchange (ISE), respectfully, filed proposals with the SEC to list and trade U.S. equity option contracts with an underlying multiplier of ten shares rather than the standard 100 shares for vanilla equity options. Six months later, the PHLX followed suit.


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What Are Mini Options

However, on November 26, 2012, The International Securities Exchange (ISE) became the first exchange to confirm a launch date of March 18, 2013 to commence trading in Mini Options. Since receiving Securities and Exchange Commission (SEC) approval for this innovative new product offering, ISE has been coordinating with its member firms to determine an appropriate date for launch readiness.

Mini Options will represent a deliverable of 10 shares of an underlying security, whereas standard contracts represent a deliverable of 100 shares. ISE will initially list Mini Options on the following securities:

• The SPDR Gold Trust (NYSE: GLD) – the ETF for gold

• The S&P 500 ETF Trust (NYSE: SPY) – the ETF for the S&P 500

Amazon (NASDAQ: AMZN)

Apple (NASDAQ: AAPL)

Google (NASDAQ: GOOG)

Mini Options will have the same expiration dates as their standard counterparts, including Weeklies and Quarterlies. Strike prices will also align to those of the standard contracts, as will the quoted bids and offers. The fees associated with Mini Options will be filed with the SEC and announced at a later date.

The specifications are identical to standard options aside from the contract multiplier. The OCC has stated that a number will be added to the standard option trading symbol to distinguish between the standard and mini option contracts. The assumption is that the other exchanges will follow this model.

Fee Cost

As yet the exchange fee that will be applied to each contract is still unknown. The ISE has stated that it would provide its mini option fee structure some time before trading commences. The fair assumption is that the fee for each contract will be 1/10th of the standard option contract, but given that the exchanges' capacity requirements for quotes has effectively doubled, the fee might not be simply divisible by ten.

This could be a big coup for the exchanges if the fee structure is not significantly different on a per-contract basis than for standard option contracts as there may be an explosion in option volume in these mini contracts given the significant amount of odd-lot equity transactions that exist today.

Strategic Opportunity

The reasoning behind this change is directly related to the increase of both the stock price and volume of some of the most popular names in the market today.

Gary Katz, President and CEO of ISE made this announcement:-

"We are very pleased to announce a launch date of March 18, 2013, to begin trading Mini Options. This exciting new product will make trading options on popular, high-priced names like Google and Apple more affordable and more flexible for the retail segment of the market. We look forward to coordinating with our member firms to achieve a smooth rollout of Mini Options in March and to broadening the reach and appeal of the options product to retail investors with this new offering."

And as we are aware many of the big name popular stocks are extremely expensive.

This is a fantastic opportunity for traders who have wanted to sell covered calls against an underlying long position, or to sell naked puts. Now this strategy can be used to play these expensive stocks!

Concerns

Concern by the SEC has been raised with regards to confusion that may arise between the 100 and ten share multiplier contracts- i.e. accounting blunders, customer error etc. The initial SEC filings for the ISE and NYSE Arca illustrate different approaches to this problem. The former has it that the underlying multiplier is ten with identical strike prices to the original contract while the later has a multiplier of 100 but the strike price 1/10th of the normal option strike price. This approach resembles the method the OCC uses to handle stock splits.

Conclusion

The potential impact on retail investors is very large if you assume that over time more and more stocks and ETFs will have mini-options. The typical account holding or selling options, according to various industry sources, has between $10,000 and $50, 000 in capital. High price names cannot be traded in these kinds of accounts – until now.

For example, to sell a covered call on Apple – one of the great income strategies of all time – used to require capital to own 100 shares, or roughly $45,000 – to sell open contract. That is now cut to $4,500.

More importantly for options sellers, the volatility of these large stocks will filter down to the mini-options. And Amazon, Apple and Google are relatively volatile stocks with options that carry fat premiums on their calls and puts. Sell puts on these names every week or every month and you can generate yields between 15% and 25% per year, something that would not have been available to the typical account before the creation of these mini-options.

This is a fantastic opportunity for traders who have wanted to sell covered calls against an underlying long position, or to sell naked puts. Now this strategy can be used to play these expensive stocks!

If Mini Options trading sounds appealing to you then:-

• Contact your broker to see if and when they are reducing commissions on mini-options trades, and

• Familiarize yourself with these five stocks and ETFs.

The impact that mini-options will have on stock and options prices is an unknown. However, expect volume and volatility to go up and the selling of puts and covered calls to be more lucrative as soon as mini-options become available.

This combination of reduced capital requirements and commissions is a boon to retail investors, especially those looking to generate consistent income from a put and call selling strategy.


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