Mini-Options Change the Game for Small Investors

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), (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.

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