Mini Options are Coming: What Does It All Mean?

The Securities and Exchange Commission (SEC) has approved Mini Options for trading on US Exchanges. Mini Options will be listed on some of the more liquid higher-priced optionable stocks and will have all the risks and characteristics of standard options. The key difference is that while standard options typically have a multiplier of 100, Mini Options have a multiplier of 10. This is good news for smaller investors seeking to incorporate option strategies into their investment portfolios. 

The CBOE plans to list Mini’s on Monday, March 18th (the Monday after March Expiration).

To understand the importance of Mini Options, consider the following scenario: Apple Inc. (AAPL) is currently trading for $480 per share. Suppose you think it’s a good company, and more importantly, a company whose stock you’d like to add to a well-diversified stock portfolio. However, at a price of $480 per share, a standard lot of 100 shares (called a round lot) could set you back $48,000. For a small investor, this amount of funds is considered out of reach. Furthermore, even if you had the funds to buy a round lot, an investor on a small budget might be placed in the uncomfortable position of having one stock completely dominate an otherwise diversified portfolio, thereby eliminating some of the benefit provided by diversification.

To that end, a small investor may opt to buy less than 100 shares (known as an odd lot) of XYZ. This is a very popular strategy among smaller investors, and while commission structures may vary between odd lots and round lots, it is quite common for a small investor to believe that it’s better to own a small number of shares as opposed to no shares at all.

With typical small investors, this is where the story comes to an end. They buy a small amount of a very expensive stock and move on to the next thing. Options never even enter the picture. After all, they don’t have the necessary number of shares to trade so much as one covered call. They may have the margin to trade credit spreads, but only until the first spread goes against their forecast. Then, they realize they lack the funds to deal with the exercise and assignment process. In fact, in just about every case, the major limiting issue for a small investor is the multiplier.

A standard option has a multiplier of 100, meaning that the exercise or assignment of an option contract leads to either a long or a short stock position in the quantity of 100 shares. Furthermore, it means that if an option has a listed price of $9.00, then the purchase of one contract is going to cost $900 plus any commissions and fees. That, in and of itself, may be too much for a small investor seeking to dip his toe in the waters of the options world… Until now!

What Does It Mean to Have an Option Multiplier of 10?

As you may be aware, standard equity options have an option multiplier of 100. This is a standard convention in US options, and we have grown accustomed to the pricing and risk measurements associated with such a multiplier. The introduction of Mini Options with a multiplier of 10 changes many of those conventions. The key change with respect to Mini Options is that each option controls 10 shares rather than 100.

This means that upon exercise or assignment, when an option is converted to its respective long or short stock shares, a Mini Option will be converted to 10 shares rather than 100 shares. This change has some consequences with respect to option pricing, as the option itself will be priced off the smaller multiplier. To illustrate, consider the following example:

With AAPL is currently trading for $480 per share. The March 500-strike call may be trading for about $9.00 per option. On a standard option contract controlling 100 shares, a purchase of the March 500 call would set an investor back $900. However, being that a Mini Option controls only 10 shares of XYZ stock, the total cash outlay required to purchase the AAPL March 500-strike Mini call would be a more palatable $90 per contract.

The benefit of the lower prices in Mini Options is two-fold. First, a smaller investor may be able to purchase a higher number of options than he could have otherwise afforded if he only had standard options at his disposal. Second, given the lower prices of Mini Options, an investor may be able to afford buying options that are closer to the money. Note that while the investor may still opt to purchase a further out-of-the-money strike, the ability to have the entire option chain available for trading is an undeniable benefit.

Stay tuned for more details on Mini Options. As the release date approaches, more information regarding their availability, option symbols (e.g. AAPL7), and initial underlying stocks will become available.

Alex Mendoza

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