Mini-Options Change the Game for Small Investors

Expensive stocks can now be played with options on the cheap

   

The options market has seen several welcome changes over the years.  In the past, you were stuck with strike prices every $5, or maybe even $10.  Eventually, spreads reduced down to $2.50 and now many large stocks have strikes at a buck apart from each other.  Weekly options on big-name stocks give you more expirations a month to play with.

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 game-changer.

Part of the reason for the switch was brought on by the expensive absolute prices for many popular stocks.  The mini-options will only be initially available for Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), SPDR Gold Trust (NYSE:GLD), Google (NASDAQ:GOOG), and the S&P 500 SPDR (NYSE:SPY).

This is a fantastic opportunity for traders who have wanted to sell covered calls against an underlying long position, or to sell naked puts.  I am a frequent user of both of these strategies as a means of generating income for my portfolio. But until recently, I haven’t played with this strategy using any of these fabulous stocks because they were too expensive.

It’s a heck of a commitment to plop down $45,000 for 100 shares of Apple, then sell a covered call against it. If that trade goes against me, I might be stuck with all that capital committed to Apple for a long time. Likewise with puts, if I sold a naked put against Google, and the stock got put to me, I would be overweighting my portfolio with this one stock.

Now, however, I can use these strategies in 10-share lots, and not have to have so much capital at risk on the trade. Whereas I might be cautious about selling a naked put on Apple at $450 a share with that 100-share commitment, it’s a lot easier to play it with 20 or 30 shares.

For example, selling the January 2014 $365 put for $20 is enticing.  I would collect a $2,000 premium and thus have downside protection to $345.  With Apple’s $120 per share in cash, I’d effectively have the stock put to me at $225.  But still, that’s a $36,500 commitment if the stock gets put to me.  With a mini-option however, I could collect $400 for two 10-share lots and not have as much at risk.

Commissions and fees will matter a lot here.  It’s one thing to trade a high-premium option contact for $8. It’s another to pay the same rate, particularly if the premiums are not juicy enough.

I would like to see these mini-options be offered for a lot more stocks, and I expect they will be … eventually. Ones to watch for would include MasterCard (NYSE:MA), Visa (NYSE:V), Priceline.com (NASDAQ:PCLN), Salesforce (NYSE:CRM), Netflix (NASDAQ:NFLX), Chipotle Mexican Grill (NYSE:CMG), Goldman Sachs (NYSE:GS), and Wynn Resorts (NASDAQ:WYNN) — all stocks whose high nominal share price makes traditional options strategies an expensive proposition.

The first round of mini-options roll out March 18 — be on the lookout for shrewd ways to implement these powerful tools.

Lawrence Meyers has sold naked puts against Priceline for the July $570 strike.


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/mini-options-change-the-game-for-small-investors/.

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