Sunday, March 3, 2013

Mini-Options, a Game Changer?

I really like selling both puts as de facto limit orders and calls.  For some more information on my option strategy or general information check here and here.  Currently one call or put option covers 100 shares.  This means if I want to sell a $500 put option on a company like Apple (AAPL) I would need $500 * 100 shares = $50,000 to be able to sell a cash secured put.  Considering that's over half of my portfolio I don't think I'll be doing that anytime soon.  This has been the biggest burden with options trading, the cash outlay if you want to avoid potential margin costs is very high for some of the high priced (nominal not valuation) stocks.

This will all change come March 18th.  It's been approved for there to be "mini-options" that act the same as regular options but only 10 shares are tied to them.  This cuts the cash outlay to secure the $500 AAPL put from above from $50,000 to $5,000.  That's a much more manageable size for the typical retail investor.

When March 18th rolls around, only a few select securities will be available with the mini-options.  Currently those are AAPL, GOOG, AMZN, SPY, and GLD.  I'm not too excited about the current choices, although GOOG does interest me even though I'm a dividend growth investor.  It'll be interesting to see how the commissions/fees play out because that will be a big determinant in your overall return with the mini-options.

More stocks will be added with two criteria that must be met.
(1) Share price (stock or ETF) must be $100+
(2) 3-month average trading volume 45,000+ contracts

Here's a list of potential stocks that I would love to see added to the mini-option list:
MMM
CVX
IBM
CMI
VFC
V

I'm sure there's more but this is just what I can think of off the top of my head for stocks that carry $100+ share prices other than the ones previously mentioned.

I like the idea of the mini-option and hope that more companies will be added to the list of potential candidates.  Companies like 3M and CVX would require potentially committing over $10k at once to a position with the traditional option contract and IBM would require $20K.  My portfolio just isn't large enough currently and even though these are solid companies I don't think I'd feel comfortable throwing down $10 to $20k all at once on one position unless I had a huge windfall that needed to be put to work.  I won't be allocating any capital to the mini-options when they first roll out, mainly due to the stocks not really meeting my core investment philosophy.  However as other companies are added I would gladly take advantage of the smaller options since you can really customize your position size from 10, 20, 30 or 110, 120...

What do you think of the mini-options?  Will you be trying to utilize the mini-option contracts?  Are there any companies that you'd like to see added?

12 comments:

  1. I don't care that much about the five stocks they're starting with, but if mini options ever extend down to stocks in the $50-$100 price range, which covers many solid dividend growth companies, I'm going to be all over some mini options. Might finally be able to live my dream of using puts to buy everything.

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    1. MyFIJ,

      I'm with you on that. The only one I'm interested in is GOOG. There's some great DG stocks that are over $100 that I listed and I'd like to see them added to that list. MCD is close as well. I'd like to see them incorporate it for smaller nominally priced stocks, but I'll just wait and see. The only issue with using the mini-options is that your commission/fees will eat up a larger chunk of the profits, but I do like the possibility to buy everything through puts.

      Thanks for stopping by!

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    2. I totally agree. If this spreads into other stocks I will be for it as well. I have to skip many of the trades because of cash restrains.

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    3. Martin,

      I hope they start adding more stocks because there's several I'd love to be able to use options with, but a $10k+ cash requirement is pretty hefty.

      Thanks for stopping by!

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  2. Cool. I've always thought a lot of Wall Street convention is very antiquated. Like paying a per share fee when trading stocks? That's how a lot of big banks still do business. Mini-options are a step in the right directon.

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    1. Headed Home,

      Until fairly recently even monthly options for stocks weren't readily available. It used to be there was one expiration per quarter for a stock. With the advance in technology I expect there to be some more changes along the lines of helping out investors. Of course, the brokerages love it because it'll open up more income from commission/fees. I like the idea but we'll see where it goes.

      Thanks for stopping by!

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  3. I like GOOG and especially AMZN as long-term investments. Neither pays a dividend. By selling mini-puts you could create an artificial income stream from each. And if the market ever dips so that you were assigned, you'd be getting shares of a solid company.

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    1. Executioner,

      GOOG is interesting and I think AMZN is going to continue to put brick and mortar companies out of business. Thinking about it now, I don't remember hearing anything about how AMZN is shutting down small businesses, maybe because you can sell through them? That could be the difference between why WMT took a lot of heat when they were expanding but I haven't heard much about AMZN. Just a random thought. I'd love to see some of the other nominally expensive DG stocks get added to the list.

      Thanks for stopping by!

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  4. This looks like a great news. Hope it will go well and becomes a common thing in the Wall Street.

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    1. Martin,

      It sounds great to me, but I don't think it'll be allowed for all stocks anytime soon. Practically, there needs to be a limit although I wouldn't mind that coming down to a $50 share price.

      Thanks for stopping by!

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  5. Will be watching these mini-options closely. I would like to see them add Costco to the list as well

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    1. Gareth,

      It'll be interesting to see how they play out and it if causes any more volatility due to more people being able to afford it now. I had forgotten about COST, definitely a great company, although I didn't like their taking on debt to pay the special dividend at the end of last year.

      Thanks for stopping by!

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