Mini Options Introduced To Trade Expensive Stocks

The International Securities Exchange (ISE) launched mini option contracts on March 18, 2013. The launch included five securities namely Google (GOOG), SPDR Gold Trust (GLD), Amazon (AMZN), Apple (AAPL) and the SPDR S&P 500 ETF (SPY) with a possibility of more securities in the future if mini options take off. According to Nasdaq, if the underlying security trades above $90, there is a possibility of an additional series of mini options. Weekly and quarterly mini options were also introduced by exchanges. Weekly mini options expire within the week compared to the usual  one month window. This gives the trader more ability to match the short-term market movement with the option.

In the stock market, a mini option contract has an appended number 7 symbol to its security name (i.e. AAPL7, GOOG7, GLD7, AMZN7, SPY7). Mini options are beneficial to small traders who cannot afford to perform large trades using the standard 100 shares per contract. Risk is managed better as the traders will be able to trade the popular stocks without taking too much  from their capital.

Traditional Options vs. Mini Options

Mini options creates an opportunity for investors to use the “wheel trading strategy.” Expert investors regularly use the “wheel” strategy to maximize returns on stocks that would otherwise deplete most margin accounts.

The wheel trade works when an investor sells a put at a strike price that is 5% below the related stock’s price. If the stock falls below the put’s strike price, the investor is obligated to buy the stock. Should the stock be assigned, the investor responds by selling a call with a strike price that is 5% higher than the stock’s price. Many investors systematically sell puts and calls on favored stocks. Take caution never to sell puts on any stock you do not want to own.

The wheel is not without risk. As with any put selling strategy, if a stock declines sharply, an investor is stuck buying the shares, possibly at a price above the market specified by the strike price. For instance, a trader who used the wheel strategy for Apple when the stock was above $600 would be underwater with the shares now hovering just over $400. This is why, as with any strategy that involves systematic selling of puts, the investor has to be willing to own the stock.

With options having one-tenth the size of conventional contracts, traders can invest on big time securities with lesser capital and concurrently, lesser risk. A traditional options contract contains 100 shares of the underlying security while a mini option contract requires only ten shares in the same security. This means that a regular option will cost 100 times the quote of the stock, while a mini option costs 10 times the quote of the stock.

Since, Apple (AAPL) is a very expensive stock, as with other stocks traded with mini options, it is very pricey to buy 100 shares of Apple trading at about $450 each. The trader will need $45,000 to buy Apple shares. But, with mini options, a trader only needs $4,500 (10x$450) to buy Apple shares. These mini options contracts have the same strike price and expiration date as the regular option contracts. The commission for buying and selling these minis would also be the same rate as regular options.

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