Introduction of U.S. Equity Mini-Options

By: Bryan Wiener On March 23rd, 2012 and April 9th, 2012, NYSE Arca and the International Stock Exchange (ISE), respectfully, filed proposals with the SEC to list and trade U.S. equity option contracts with an underlying multiplier of ten shares rather than the standard 100 shares for vanilla equity options. Six months later, the PHLX followed suit. The reasoning behind this change is directly related to the increase of both the stock price and volume of some of the most popular names in the market today: SPDR S&P 500

, Apple

, Google

, Amazon

and SPDR Gold Shares

. The general guidelines for inclusion are that (a) the industry average daily options volume over the previous three calendar months is at least 10,000 contracts and (b) the price of the underlying security is at least $150. The popularity of the option industry has grown significantly in recent years, as the casual investor has developed an understanding and desire to utilize options to leverage underlying stocks moves and/or to hedge their own portfolios. The catch-22 to a stock's appreciation is that it becomes more expensive for the casual investor to continue investing as the price increases, even when using options as the investment vehicle. According to a

article on May 9, 2012, 77 percent of executed trades in AAPL by TD Ameritrade customers have been odd lots (less than 100 shares). The new mini options provide both the ability to trade expensive deep in-the-money options to take advantage of an underlying move in any of these names and a new hedging vehicle for a less-than-100-share position. Concern by the SEC has been raised with regards to confusion that may arise between the 100 and ten share multiplier contracts- i.e. accounting blunders, customer error etc. The initial SEC filings for the ISE and NYSE Arca illustrate different approaches to this problem. The former has it that the underlying multiplier is ten with identical strike prices to the original contract while the later has a multiplier of 100 but the strike price 1/10th of the normal option strike price. This approach resembles the method the OCC uses to handle stock splits. On November 26th, 2012, the ISE announced that March 18th, 2013 would be the launch date to trade mini options in Apple, Amazon, SPDR Gold Trust, Google and the S&P 500. The specifications are identical to standard options aside from the contract multiplier. The OCC has stated that a number will be added to the standard option trading symbol to distinguish between the standard and mini option contracts. The assumption is that the other exchanges will follow this model. What is unknown as of this article is the exchange fee that will be applied to each contract. The ISE has stated that it would provide its mini option fee structure some time before trading commences. The fair assumption is that the fee for each contract will be 1/10th of the standard option contract, but given that the exchanges' capacity requirements for quotes has effectively doubled, the fee might not be simply divisible by ten. This could be a big coup for the exchanges if the fee structure is not significantly different on a per-contract basis than for standard option contracts as there may be an explosion in option volume in these mini contracts given the significant amount of odd-lot equity transactions that exist today. The exchanges' quarterly earnings may have gained some optionality with this upcoming product introduction.