New Mini Options, A-T-M Options Premiums, and Volatility Index Levels

As has been well-reported, CBOE plans to begin trading five new Mini options (with ticker symbols AAPL7, GOOG7, AMZN7, GLD7, and SPY7) on Monday, March 18 www.cboe.com/mini
The Mini options have generated lots of interest, and some people have asked about the possible impact of Mini options on the size of the premiums that individual investors pay or receive.

The table below provides information about sample premium levels today for eight different options classes that are near-the-money and have expiration dates of April 20, 2013.

The standard-size options have a 100 multiplier, while the new Mini options with tickers AAPL7, GOOG7, AMZN7 have a 10 multiplier. Using the table below, an investor could pay about $1,690 for a standard-size AAPL 440 call option, while an investor might pay around $169 for a Mini AAPL7 440 call option, once it becomes available. Of course, options prices can change rapidly and are impacted by many factors such as implied volatility and time to expiration. The Mini options are designed to provide added investment flexibility. For example, suppose an investor holds 20 or 150 shares of AAPL or GOOG stock. The new mini options with tickers AAPL7 and GOOG7 could provide that investor with tools that have the potential to be more efficient and tailored for strategies that involve both stocks and options – strategies such as –

  • protective puts
  • covered calls
  • covered combinations.

In addition, please note that the cash-settled Mini-SPX options (ticker XSP (1/10th the size of SPX, with a multiplier of 100)) have been listed since 2006 www.cboe.com/XSP

PREMIUMS FOR INDEX OPTIONS STRATEGIES

Today (Friday) was the “roll date” for CBOE’s benchmark indexes (BXM, BXD, BXR, and BXN) that engage in one-month A-T-M buywrite strategies.

 photo 11_zps92cece46.jpg

COMPARING A-T-M ONE-MONTH PREMIUMS AND VOLATILITY INDEXES

In the table above, I think it is interesting to compare the fifth column (premium as % of underlying) to the eighth column (related volatility index).

When people have asked about how much gross premium is generated by the BXM Index, I suggest that one way to gain a rough idea of an answer is to divide the VIX Index by 10, and the resulting number often is near the % number for the BXM premiums. For example, today the VIX was around 11.48 and the BXM generated a gross premium of 1.2%. On Expiration Friday in November 2008, the VIX was around 80 and the BXM Index generated a gross premium of 8% (see the Exhibit below from a Jan. 2012 paper by Asset Consulting Group –
An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns – available at www.cboe.com/benchmarks).

 photo 22_zps6a20a3b6.jpg