Mini AAPL Options- A Quick Glance and Review

Bryan Wiener The options dreams of small time investors have finally come true: yesterday marks the launch of mini options in Apple APPL, Amazon AMZN, Gold GLD, Google GOOG and the S&P 500 SPY. The price of these staple names has prevented most casual investors from accumulating 100 shares or more via traditional options, thus preventing investors from executing covered call strategies (selling an out of the money call to create income on the stock position, for example). As of yesterday, this problem is no more. Investors are also able to hedge their positions more cheaply by not having to buy puts with a 100 share multiplier. Real-Time Analysis At a glance, trading in the mini options is light. They are only traded in the serial months and the bid/ask spread is expectedly wider than the standard options. The assumption is that weekly mini options will be introduced once the exchanges and market makers demonstrate an ability to handle heavier traffic and trading suggests the weeklies will be successful. Looking at the AAPL April 20, 2013 455 call, the volume was 2% of the standard options and the bid/ask spread is 2 to 3 times as wide. The bid/ask sizes are quite thick though, even given the difference in multiplier. Essentially, the market makers are willing to trade bigger for a wider spread. This introduces 2 key points: fungibility and transaction costs. Fungibility A source at the Option Clearing Corporation discussed the topic of fungibility. The question was in regards to how the OCC considers off setting positions: long 10 mini options vs. short 1 standard option of the same symbol/strike/expiry. For margin and risk purposes, the cumulative position is fungible, i.e. the two positions will offset each other (inter-contract strikes and spreads). With respect to expiration, the two contracts are treated independently and there is an inherent risk if the closing price at expiration is at or very close to a strike price. He also discussed whether block trades to get out of mini/standard positions is a live topic; the OCC representative said he had heard some chatter but nothing specific. Exchange Fees What was unclear but very important is the issue of exchange fees. Essentially, the fees for the mini options are 1/10th of that of the standard options. The exchanges are essentially being fair in the allocation of fees and should be applauded (fee analysis drawn from the CBOE fee schedule). What Exchanges Are Playing the Game? As of this publication, the following exchanges are allowing traders to make active markets in AAPL April 20, 2013 options: AMEX, ISE, CBOE, ARCA, NASDAQ, C2 and BOX. I assume PHLX and BATS are not too far behind, as well as NASDAQ BX. MIAX, where are you? Final Analysis There's only been one day of trading and the minis are only being traded in the monthly contracts (the OCC contact stated that there is talk to make the mini options weeklies in the future), so one shouldn't be concerned with the lack in volume just yet. The smaller investor will soon enough be trading these widely anticipated contracts. In doing so, they will be able to earn income on short out of the money calls, hedge downside risk by buying puts with a cheaper multiplier and also be able to take much cheaper punts on directional moves in these more expensive symbols. This is a very exciting time for the options market, and will provide less-experienced traders a training ground to hone their skills to trade standard options in the future. It's also a win-win for the exchanges.