A Useful Tool for Trading High-Priced Securities

What are mini options?

Mini options are options contracts in which the underlying security is 10 shares of a stock or exchange-traded fund (ETF). This is the main difference between mini options and standard options, which have 100 stocks as the underlying security. Mini options are no longer available for single stocks or ETFs, but you can trade them on indices.

Key takeaways

  • Mini options, also known as E-mini options, are exchange-traded options contracts that represent a fraction of the value of a corresponding standard options contract.
  • Mini options are most commonly found listed on benchmark indices where the underlying asset is an E-mini index futures contract.
  • Cboe tested mini options on several large-cap stocks and ETFs, but abandoned them in December 2014.

Understanding mini options

Mini options are only listed on the main indexes. Cboe's Mini-SPX (XSP), for example, is an index options product launched in 1997 and designed to track the underlying S&P 500 index. Ten times smaller in size than the Cboe contract Standard SPX options, XSP provides greater flexibility for new index options traders or traders managing an individual portfolio.

CME Group also offers Micro E-mini options on the S&P 500 (MNQ) priced at 1/10th Mini options size. Like other index futures and options products, mini index options are cash-settled and European-style. Various mini-index options currently trade on the S&P 500, Nasdaq 100 and Russell 2000.

Mini stock options

Physically settled mini options began trading on the Cboe Options Exchange on March 18, 2013, when mini options on the following five stocks and ETFs were introduced:

The option symbols for these mini options have been changed, with the number seven added to the symbol. Thus, the mini series of options for Amazon would have started with the identifier AMZN7, while that for Apple would start with AAPL7.

These options series were discontinued on December 17, 2014, shortly after their introduction, and the mini options on stocks and ETFs are no longer traded.

Unlike mini index options, these mini options had physical settlement, meaning the actual shares might have had to be delivered if the position was not closed before expiration. They were American style, meaning they could be exercised on any business day before they expired.

Mini-options expiration was the Saturday immediately following the third Friday of the expiration month, until February 15, 2015. After this date, expiration was to be the third Friday of the expiration month.

The strike prices and strike price intervals for mini options are the same as for standard options on the underlying security.

Examples of mini options

The main rationale for Cboe's introduction of mini-options was that they allowed fewer shares of the underlying stock or ETF to be speculated or hedged.

For example, a standard option on a stock trading at $100 may be valued at $5. A standard option contract represents 100 shares, the option price must be multiplied by the number of shares represented by a contract; This is called the options multiplier. In this case, a contract would cost the investor $500. But what if an investor only owns 50 stocks and wants to hedge this long option?

Acquiring a standard policy means that the investor would pay a significant premium for additional protection that they do not need. The mini-option is suitable in this case, since the investor can purchase five mini-option contracts. Since each mini-option represents 10 shares, the option multiplier here is 10.

Note that the XSP mini-option multiplier is 100. As this option has a value of one tenth of the value of the S&P 500, each mini-option contract represents 10 units of the S&P 500.

Advantages and disadvantages of mini options

Mini options offer a number of benefits to investors, but they do have some drawbacks.

Benefits

  • Lower expense: The biggest advantage of mini options is that they require a much lower down payment, about one-tenth of the amount required for a standard option.
  • Particularly suitable for covering irregular lots: Many investors hold odd lots (that is, fewer than the standard lot of 100 shares) of stocks that trade in the triple digits. Mini options are particularly suitable for hedging these exposures in the most efficient way possible, especially for strategies such as protective put buying or call writing where it is necessary to offset the number exact number of shares held.
  • Good tool for those who have limited capital: Mini options are a good investment tool for those with limited capital, such as students and small investors, to trade securities at very high prices.

The inconvenients

  • Commissions are higher as a percentage: Commissions can really add up when trading mini options. For example, if the commission for an options trade through an online broker is a flat fee of $10 and a standard contract (of 100 shares) trades at $10, the commission equals 1%. But if 10 mini-options contracts are used instead, the commission would be $100 or 10% of the traded value. Even if only five mini options contracts are used, the commission is still $50 or 5%.
  • Wider bid-ask spreads and lower liquidity: Mini options appear to have much wider bid-ask spreads and significantly lower open interest than their standard options counterparts, resulting in lower liquidity.

Which stocks have mini options?

Mini options on stocks and ETFs no longer trade, but you can buy mini options on benchmarks such as the S&P 500.

What are Micro E-Mini options?

Micro E-mini options are one-tenth the size of e-mini options, giving investors the ability to trade with precision and for less capital.

How much does a mini option cost?

Instead of an option premium multiplier of 100, mini options have a premium multiplier of 10. To find the cost, you need to multiply the price listed for a mini option by 10.

The essential

Mini options offer traders and retail investors another way to hedge small amounts of stocks. They differ from traditional options contracts in that they are based on an underlying lot of 10 stocks instead of 100. Mini options are available on benchmark indexes, although they were once available on a handful large companies for a short period of time. Remember that options trading carries significant risks, so it is worth learning as much as possible about these contracts before trading.

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