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Mini Options, Big Potential

Mini options lower the capital you need to play big names


The options world — including the weekly options world — is on the leading edge of innovation within the trading industry. Often these changes benefit institutional investors and professional traders at the expense of retail investors, such as the current trading bias in high speed trading.

Last week, the CBOE (Chicago Board Options Exchange) did something for the retail investor. Beginning March 18, mini-options representing just 10 shares, rather than 100, will be available.

Initially only five stocks and ETFs will have mini-options:

  • The SPDR Gold Trust (NYSE:GLD)  — the ETF for gold
  • The S&P 500 ETF Trust (NYSE:SPY) — the ETF for the S&P 500
  • Amazon (NASDAQ:AMZN)
  • Apple (NASDAQ:AAPL)
  • Google (NASDAQ:GOOG)

The potential impact on retail investors is very large if you assume — and I do — that over time more and more stocks and ETFs will have mini-options. The typical account holding or selling options, according to various industry sources, has between $10,000 and $50,0000 in capital. High price names cannot be traded in these kinds of accounts — until now.

For example, to sell a covered call on Apple — one of the great income strategies of all time — used to require capital to own 100 shares, or roughly $45,000 — to sell open contract. That is now cut to $4,500.

More importantly for options sellers, the volatility of these large stocks will filter down to the mini-options. And Amazon, Apple and Google are relatively volatile stocks with options that carry fat premiums on their calls and puts. Sell puts on these names every week or every month and you can generate yields between 15% and 25% per year, something that would not have been available to the typical account before the creation of these mini-options.

I expect brokerage houses to cut their fees on trades involving mini-options. This cold greatly reduce the transaction costs associated with selling or buying options. Is this optimism misplaced? My online broker, OptionsXpress (owned by Schwab) is one of the most expensive of the online brokers but recently introduced very aggressive pricing on mini-future contracts.

What should you do right now?

Nothing — except contact your broker to see if and when they are reducing commissions on mini-options trades. You may also want to become familiar with these five stocks and ETFs. The impact of the mini-options on stock and options prices is a true unknown. I do expect volume and volatility to go up and the selling of puts and covered calls to be more lucrative as soon as mini-options become available.

This combination of reduced capital requirements and commissions is a boon to retail investors, especially those looking to generate consistent income from a put and call selling strategy.

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