Kim 7,512 Report post Posted March 19, 2013 On Monday NYSE Euronext (NYX) launched mini option contracts on five of the most actively traded stocks and exchange traded funds. The move enables NYSE Arca and Amex customers to trade options in smaller blocks than before, thus enabling investors with limited capital to trade options on higher priced issues without taking outsized risks. The first five securities with available mini options are Google (GOOG), SPDR Gold Trust (GLD), Amazon (AMZN), Apple (AAPL) and the SPDR S&P500 ETF (SPY). Steve Crutchfield, the Head of NYSE Euronext U.S. Options Exchanges joined Breakout from the New York Stock Exchange to explain to what that all means. 1. Why minis? They're less expensive per transaction. The actual price of an option contract is typically $100x the quote. If a customer wanted to get long Apple calls listed at $10, the actual price would be $1,000. If Apple were a $45 stock it wouldn't be a problem. Because Apple is a $450 stock, its options would trade 10x as much. Suddenly our $1 Apple call is trading at $100 and the lowest possible cash outlay a trader can pay to by the contract is $100 x 100 or $10,000. Minis solve that problem. "A mini option is an option that delivers 10 shares of an underlying stock rather than the standard 100 shares," Crutchfield explains. Using the mini option contracts, investors can hedge their positions for less money. 2. How should minis be used? Continuing with the example of an Apple shareholder, Crutchfield points out that an investor with $25,000 of Apple stock owns just over 50 shares. Previously, buying one lot of options to hedge that position would give the shareholder control of twice as many shares as they actually own. Options trading is hard enough without having to by or sell twice your underlying position worth of contracts to control risk. With minis our hypothetical Apple shareholder can simply buy 5 or 6 protective puts and keep their hedge in line with the underlying stock. 3. What's the risk profile of minis? The same as normal calls and puts. It's the deep end of the investing pool and the newbies can get themselves underwater pretty fast. It's all about education and understanding. Crutchfield argues that puts and calls can be used to minimize the risk of a portfolio in the right hands. Crutchfield says minis may expand beyond the original five securities in time. For investors with big knowledge but more modest portfolios, minis are a great addition to their war chest in the battle for profits. http://finance.yahoo.com/blogs/breakout/everything-know-mini-options-173812427.html Here are few more links about the new mini options: http://www.forbes.com/sites/steveschaefer/2013/03/18/the-low-cost-way-to-play-apple-google-and-amazon-mini-options-hit-the-market/ http://www.reuters.com/article/2013/03/15/us-options-mini-launch-idUSBRE92E0ZT20130315 What does it mean for us? At this point, not much. I have no intention using those options currently - however, it might change if I see a good opportunity to trade some strategy which would be too expensive using regular options. For example, if you want to trade a GOOG April ATM straddle, it is trading right now around 48.30. It will require $4,830 to buy it (48.30x100). Using the same straddle with mini options, it will reduce the price to $483 (48.30x10). A word of caution: please be careful when submitting orders for those five stocks (GOOG, AMZN, AAPL, GLD and SPY) and make sure you are using regular options and not mini. TOS uses (mini) when describing them, while IB adds "7" to the option class, so there are GLD and GLD7. Share this post Link to post Share on other sites
Marco 221 Report post Posted March 19, 2013 I suppose IB still charges $0.70 per lot? Share this post Link to post Share on other sites
K. Miller 3 Report post Posted March 19, 2013 (edited) Thats what I was thinking, makes sense on some stocks like AAPL, but on SPY, seems like a good idea mostly for the broker. Edited March 19, 2013 by K. Miller Share this post Link to post Share on other sites
Kim 7,512 Report post Posted March 19, 2013 It really doesn't make sense to do it on stocks like SPY or GLD. I would say the stock price needs to be at least $200-300 to justify buying the minis. Share this post Link to post Share on other sites
indiana*josh 59 Report post Posted March 19, 2013 It will be interesting to see how closely the price of the minis tracks the price of the regular options. I wonder if there will be opportunities for arbitrage. 1 cwelsh reacted to this Share this post Link to post Share on other sites
Marco 221 Report post Posted March 19, 2013 It will be interesting to see how closely the price of the minis tracks the price of the regular options. I wonder if there will be opportunities for arbitrage. Don't worry some market maker will stick it into a machine and if there's an arbitrage it will only be there for a split second. Share this post Link to post Share on other sites
