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New Mini-Options Could Change Strategies and Face of Trading

10-share alternative opens up options trading to more retail investors

by 1/25/2013 4:32:05 PM
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The options market is about to undergo another radical change, breaking with long-standing tradition by allowing so-called "mini-options," or options that control just 10 shares of an underlying equity as opposed to the traditional 100 shares.

And industry experts, including Schaeffer's own Todd Salamone, say it could also change the face of who gets to trade options in the first place.

"The biggest impact of this will be on the retail trader ... this will allow folks who couldn't afford either the underlying equities or the high-priced options in the first place to get into the game," says Salamone, Senior Vice President of Research for Schaeffer's Investment Research.

In the last decade, the industry has already seen several innovations, including the addition of weekly options on many underlying equities, as well as a simpler nomenclature and ordering system.

And on March 18, all the option exchanges will start allowing the new "mini-options." At the start, they will only be issued on five underlying entities:

  • Apple Inc. (NASDAQ: AAPL)
  • Google Inc (NASDAQ: GOOG)
  • Amazon.com, Inc. (NASDAQ: AMZN)
  • SPDR S&P 500 ETF Trust (NYSEARCA:SPY)
  • SPDR Gold (ETF) (NYSEARCA:GLD)

These five tickers are all priced higher than $100, and all are actively traded. Apart from the new lower stock requirement, and lower prices, all else will stay the same. That includes strike prices, the availability of weekly options, and the ability to conduct traditional option strategies such as covered calls/puts, strangles, and straddles. And it is expected that fees will be the equivalent of 1/10th of a full 100-share option across all the exchanges (investors should check with their individual brokerages for their fee schedules on the new mini-options).

The move was made to open up option trades on expensive stocks for smaller investors, says Boris Ilyevsky, Managing Director for the International Securities Exchange (ISE), especially since a lot of those retail accounts have the ability (but not the means) to trade options.

"This is meant to be a retail-oriented product ...the average retail account has between $10,000 and $50,000 in assets," Ilyevsky says. "Those kind of investors usually don't invest in a full 100 share lots of Apple, even now below $500 and certainly not when it was at $700, but many do own smaller amounts."

"If they own 10-20 shares, this makes it easier for them to do a covered call or something or a buy-write. This could really bring many new investors into the options game given the popularity of some of these products on the equity side."

The decision to add these specific tickers first was reached after surveying brokerages to see what stock tickers had the most so-called "odd lots," or ownership of fewer than 100 shares. In addition, the ISE and other exchanges asked how many accounts had the ability to trade options but weren't using it, and the answer was surprising.

Ilyesky also says that depending on the reaction to the new offering, additional larger priced underlying equities and ETFs could be added to the mix soon.

Salamone says a few potential candidates could be added to the list, including: MasterCard Inc (NYSE:MA); Visa Inc (NYSE:V); Priceline.com Inc (NASDAQ:PCLN); Salesforce.com, inc. (NYSE:CRM); Netflix, Inc. (NASDAQ:NFLX); the iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT); Chipotle Mexican Grill, Inc. (NYSE:CMG); Goldman Sachs Group, Inc. (NYSE:GS); Union Pacific Corporation (NYSE:UNP); and Wynn Resorts, Limited (NASDAQ:WYNN).

"These are all high-priced and some have a lot of interest, and some they may add to drive more interest in the option markets," Salamone says.

He adds that the new mini-options allow much greater flexibility for those looking to ease their way into or out of an option position (sometimes called "legging in or out"). An investor can buy a few options at a time to become fully covered, for example, and sell out of a position piece by piece as well, instead of having to do it all at once.

"It also could mean a change for option day traders, who can't afford to hold a position overnight on say, Apple, because any breaking news overnight puts them in a position where they can't control their risk," Salamone says. "But with the minis, more folks might hold them overnight because the absolute risk is more controlled."

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