Mini Options Revisit: A Mini Mistake?

By Bryan Wiener, a Sang Lucci contributor When the US option exchanges, headed by the CBOE, ISE and PHLX, set out to expand the US equity options market via the introduction of the mini-option classes in APPLE AAPL, Amazon AMZN, SPDR Gold GLD, Google GOOG and SPY in March, the presumable goal was to offer novice or undercapitalized traders the ability to trade options at a fraction of the cost or risk. BATS went so far as to offer free trading for its members in order to increase trading activity. Per a BATS press release through its website, Jeromee Johnson, Vice President and head of BATS Options was quoted as saying “We're pleased to give investors affordable access to these five high-priced and highly liquid stocks through Mini Options.” After 6 months of trading, that statement has not rung true. The sad reality is that the US mini-option market is both illiquid and expensive. According to the OCC website on Friday, September 13, the total contract volume for all standard sized SPY contracts in the September 21 serial expiration stands at 6,907,424. The total contract volume for mini-options: 35,450, which is roughly .5%. GLD's ratio was .8%, AAPL 2.5%, AMZN 3.8% and GOOG 3.8%. Understandably, the mini contracts are ideal for the mom and pop customer, but the disparity in volume appears very underwhelming. Furthermore, the bid/ask spread is quite excessive, which probably plays a large factor in this issue. According to Yahoo! Finance on Friday, the closing NBBO market in the standard SEP21 SPY 170 call was .65/.67, with volume for the day finishing at 20,830. The comparative numbers in the mini's: .56/.76, 369. That is quite a difference. Analytically, the reason for such a disparity may lie in the nature of the traders' activity. It may very well be that the demand for volume in mini options increases as the time to option expiration decreases. The other dominating variable is the market makers' bid/ask spread. It is quite costly for an under-capitalized or novice trader to cross a .20 wide bid/ask spread. Therefore, the likelihood for heavy volume in the minis is very low. The whole thing could be just be cyclical: market makers anticipate low volume, therefore widen out, which dissuades mini option customers. The only way to prevent the mini options from failing is to increase volume; otherwise the exchanges and market makers are wasting quoting resources and capacity. The only way to increase volume is by market makers tightening spreads. And the only way market makers will tighten their spreads is if the OCC allows the mini and standard options to be fungible. The OCC should allow market makers to cancel out 1 short standard option contract with 10 long option contracts. This might be a revolutionary idea, considering actual and effective open interest in the mini and standard option contracts will be different, but does it really matter? Really, it should not. Risk is already fungible, so contracts should be able to be shipped out at the end of day automatically per trading account, if so desired, and the future of the US mini option market can be saved.