Posted by On March 18, 2013 investors began making use of the new exchange-traded mini options. Let’s take a look at the specifics of the options and at: (1) how they might fit in the options market in general, and (2) how they might fit The Monthly Income Machine credit spread program in particular.
The Underlyings
Examples of available mini options include:
- SPY (ETF)
- GLD (ETF)
- AAPL (equity)
- AMZN (equity)
- GOOG (equity)
The common threads that led to these being mini options offered are that these underlyings are (1) heavily traded and (2) relatively expensive.
How Minis Differ – and Not Differ – from Standard Monthly Options?
Minis are the same as their monthly, weekly, and quarterly counterarts in terms of:
- Strike Prices
- Expiration Dates
- Bid/Ask quotes
- Commissions (careful – they’re not really the same!)
Minis differ from monthly, weekly, and quarterly options in terms of:
- The number of underlying shares deliverable per option. Minis are 1/10 the size of standard option; therefore each option controls 10 shares of the underlying rather than 100 shares, i.e. premium multiplier is 10 rather than 100.
Margin on Credit Spreads
Because the option is 1/10 standard size, margin requirement is 1/10 standard margin. For example, if we were dealing with an XYZ 230/235 spread, the margin requirement for a standard option XYZ credit spread would be 100 (number of shares controlled) times $5 (number of dollars between strike prices) = $500 margin.
If instead we used the mini XYZ options for the credit spread, our margin calculation is 10 (number of shares controlled) times $5 (number of dollars between strike prices) = $50.
Commissions and Fees
Brokerage firm may state that commissions/fees are the “same per contract” as standard options (monthly, weekly or quarterly) which is true – but misleading. Since the mini is 1/10 the size of the standard option, you would need 10 times as many mini options as standard ones to control the same number of shares of the underlying; hence commissions for an equal value of underlying is much, much higher with the minis.
Mini Options and You
Here, in no particular order, are several mini option factors that warrant consideration:
Provides a clue – Mini options will almost certainly be the province of retail rather than institutional investors. Consequently, shifts in mini option stats regarding volume, share of total option volume, put-call ratios, etc. can provide a clue about what the “smart money” compared to the “little guy” is thinking and doing, i.e. investor sentiment differentiation between institutional and retail investors.
Smaller accounts – Because of the much lower margin requirements, accounts that are challenged with respect to available margin funds may be able to use “The Machine” where credit spread investing is less feasible using full-size option contracts.
Odd lot equity position hedging – Minis provide a real advantage to investors who may not own a round lot (100 shares) of GOOG requiring an investment of $100,000+, but instead own 10 or 20 shares of this expensive stock. Such investors now would have the opportunity to own some protective put options matched to the size of their stock holding.
Covered calls – The odd-lot benefit for hedging stock positions with mini puts also holds for writing covered calls against less than round lot stock holdings of expensive stocks.
Extra longs – One of the techniques employed by The Monthly Income Machine includes the use of credit spreads with the “insurance” of some extra long positions to protect against an adverse move. If one wanted to use this approach with a position involving, say, two standard option conforming credit spreads, the cost of an extra long position using a standard option might use up all, or too much of, the potential premium income. However, one could add some number of less costly mini option extra “longs” that may make sense relative to premium earnings on the spreads.
Liquidity – In the short time the five mini options have been available, the trading volume growth has been encouraging. I expect mini option liquidity to be sufficient for our purposes. (I also expect that more of our “usual suspects” will eventually have minis available in the future).
Bottom line, I believe there are a number of special situations where the new mini options can provide opportunities for the SaferTrader.
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Maybe use them to diversify the number of spreads/condors that you own?