“As options’ popularity has grown among retail traders over the last decade, the exchanges have responded with more products. Weekly options, introduced in 2005, have gained to the point that the top options-centric online brokers report that they comprise almost half of their options volume this year,” Theresa W. Carey reports for Barron’s. “Most expect weekly options to pass regular monthly options in volume this year.”
“On March 18, the exchanges will introduce mini-options on three high-priced active stocks and two exchange-traded funds: Apple (ticker: AAPL), Google (GOOG), Amazon (AMZN), SPDR S&P 500 ETF Trust (SPY) and SPDR Gold ETF (GLD),” Carey reports. “All of these equities are priced well over $100 per share, which makes it tough for most retail investors to buy them in 100-share blocks. The new mini-options will make them more affordable—representing just 10 shares of stock.”
Carey reports, “Under the traditional 100-share terms, near-the-money April calls for Apple, for example, are in the $15-$20 range for a contract, so a single call option could set you back about $2,000. If you were to write a covered call — buying 100 shares of Apple and selling the April 440 strike — you’d be looking at a price tag of over $42,000. Investors could wait for a stock split or two to make these pricey stocks easier to buy, but they’d have to wait a long time. So to keep the little guy involved, mini-options are coming.”
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“According to a Bloomberg article on May 9, 2012, 77 percent of executed trades in AAPL by TD Ameritrade customers have been odd lots (less than 100 shares),” Bryan Wiener reports for Benzinga. “The new mini options provide both the ability to trade expensive deep in-the-money options to take advantage of an underlying move in any of these names and a new hedging vehicle for a less-than-100-share position.”
“What is unknown as of this article is the exchange fee that will be applied to each contract,” Wiener reports. “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.”
Wiener reports, “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. The exchanges’ quarterly earnings may have gained some optionality with this upcoming product introduction.”
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“The potential impact on retail investors is very large if you assume – and I do – that over time more and more stocks and ETFs will have mini-options,” Michael Shulman writes for InvestorPlace.
“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,” Shulman writes. “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.”
Shulman writes, “What should you do right now? Nothing – except contact your broker to see if and when they are reducing commissions on mini-options trades. You may also want to become familiar with these five stocks and ETFs. The impact of the mini-options on stock and options prices is a true unknown. I do 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.”
Read more in the full article here.