Mini options: a useful tool for trading high-priced securities

What is a mini option?

Mini option is an option contract, the underlying security is 10 stocks or exchange-traded funds (ETF). This is the main difference between mini options and standard options. Standard options use 100 shares as the underlying security.

Mini options are no longer applicable to single stocks or ETFs, but mini options for indexes are still being traded.

Key points

  • Mini options, also known as E-mini options, are exchange-traded option contracts whose value is only a small part of the corresponding standard option contracts.
  • Mini options appear most often on benchmark indexes, where the underlying asset is E-mini index futures.
  • The Chicago Board Options Exchange tried several large-cap stocks and ETF mini-options, but these were discontinued in December 2014.

Learn about mini options

Mini options are currently only listed in major indices. For example, the Chicago Board Options Exchange’s Mini-SPX (XSP) is an index options product that was launched in 1997 to track the S&P 500 index. At 1/10day Compared with the size of standard SPX options contracts, XSP provides greater flexibility for new index options traders or traders who manage personal portfolios.CME Group also launched the Mini E-Mini option of the Standard & Poor’s 500 Index (MNQ), further 1/10day The size of the mini option (or 1/100day General index options).Like other index futures and options products, mini index options are cash-settled European-style options.

Various mini index options are currently traded on the S&P 500 Index, the Nasdaq 100 Index and the Russell 2000 Index.

Mini Stock Options (March 2013-December 2014)

Physically settled mini options began trading on the Chicago Board Options Exchange (CBOE) on March 18, 2013. At that time, the following five stocks and ETF mini options were launched:

  • Amazon (NASDAQ: AMZN)
  • Apple (AAPL)
  • Google (GOOG)
  • SPDR Gold Trust (GLD)
  • SPDR Standard & Poor’s 500 (SPY)

The option symbols of these mini options have been modified, adding the number 7 after the symbols. Therefore, Amazon’s mini option series will begin with the identifier AMZN7, and Apple’s mini option series will begin with AAPL7.

These option series were terminated on December 17, 2014 shortly after their launch, and mini options on stocks and ETFs were no longer traded.

Unlike mini index options, these mini options have physical settlement, which means that if the position is not closed before expiration, the actual stock may have to be delivered. They are American, which means they can be exercised on any working day before expiration. The expiration date of the mini option is the Saturday after the third Friday of the expiration month until February 15, 2015. On and after that date, the expiration date will be the third Friday of the expiration month. The strike price and strike price range of the mini option are the same as the standard option of the underlying security.

Mini option example

The main reason for the Chicago Board Options Exchange to introduce mini options is that they make it possible to speculate or hedge against the underlying stocks or smaller shares of the ETF.

For example, a standard option with a stock trading price of US$100 might be priced at US$5. Since a standard option contract represents 100 shares, the option price must be multiplied by the number of shares represented by one contract; this is called the option multiplier. In this case, a contract will cost the investor $500. But what if the investor only has 50 shares and wants to hedge this long option?

Obtaining a standard contract means that investors will pay high fees for additional protection they don’t need. Mini options are suitable for this situation because investors can purchase five mini options contracts. Since each mini option represents 10 shares, the option multiplier here is 10.

Take Apple’s April 2014 mini-option call option of $530 on March 6, 2014 as an example. At that time, the stock was trading at $530.75. The mini option is quoted at US$14.85, which means that a contract for 10 shares of Apple stock will cost US$148.50. The standard contract transaction price for the same strike price and expiry date is US$14.70, which means it will cost US$1,470, which is almost 10 times the corresponding mini option.

Please note that the multiplier for XSP mini options is 100. Since the value of the option is one-tenth of the S&P 500 index, each mini option contract represents 10 units of the S&P 500 index.

Pros and cons of the mini option

The mini option has the following advantages:

  • Lower expenditure. The biggest advantage of mini options is that they require much lower cash outlays, about one-tenth of the amount required for standard options.
  • Especially suitable for hedging scattered stocks. Many investors hold odd shares—that is, less than 100 shares in a standard lot size—that are traded in three digits. Mini options are particularly suitable for hedging these risk exposures most effectively, especially for strategies that need to offset the exact amount of stocks held, such as buying protective put options or selling call options.
  • It is a good tool for people with limited funds. Mini options are a good investment tool for students and small investors with limited funds, and they can trade very high-priced securities.

On the other hand, the mini option has the following disadvantages:

  • Higher commissions calculated by percentage. When trading mini options, commissions do increase. For example, if the commission for option trading through an online broker is a fixed fee of $10, and the transaction price of a standard contract (100 shares) is $10, the commission is 1%. But if 10 mini option contracts are used, the commission will be 100 USD or 10% of the transaction value. Even if only five mini option contracts are used, the commission is still US$50 or 5%.
  • Larger bid-ask spreads and lower liquidity. Compared with standard options, the bid-ask spread of mini options seems to be much larger, and the open interest is much smaller, which means lower liquidity.
  • Only applicable to very limited securities. As of March 2014, mini options are only applicable to six securities (also AAPL7, AMZN7, GOOG7, GLD7, SPY7, XSP).

Bottom line

Mini options are suitable tools for trading and hedging high-priced securities. However, because they only apply to a small number of securities, they may have a limited following before they are offered to a wider range of stocks and ETFs.

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