Mini Options: A Useful Tool for Trading High-Priced Securities

What Are Mini Options?

Mini options are option contracts where 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 shares as the underlying security. Mini options are no longer available for single stocks or ETFs, but you can trade them on indexes.

Understanding Mini Options

Mini options are only listed on major indexes. The Cboe's Mini-SPX (XSP), for instance, is an index option product launched in 1997 designed to track the underlying S&P 500 Index. At a tenth the size of the standard SPX options contract, XSP provides greater flexibility for new index options traders or traders managing an individual portfolio.

The CME Group also offers Micro E-mini options on the S&P 500 (MNQ) that are 1/10^th the size of Mini options. 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

Mini options with physical settlement began trading on the Cboe Options Exchange on March 18, 2013, when mini options on the following five stocks and ETFs were introduced:

• Amazon (Nasdaq: AMZN)
• Apple (AAPL)
• Google (GOOG)
• SPDR Gold Trust (GLD)
• SPDR S&P 500 (SPY)

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

Unlike mini index options, these minis had a physical settlement, which means that the actual shares may have had to be delivered if the position was not closed before expiration. They were American-style, which means that they could be exercised on any business day before expiration.

Expiration for mini options was the Saturday immediately following the third Friday of the expiration month, until Feb. 15, 2015. Following that date, expiration had to be the third Friday of the expiration month.

Examples of Mini Options

The main rationale for Cboe’s introduction of mini options was that they made it possible to speculate on or hedge fewer shares of the underlying stock or ETF.

For example, a standard option on a stock trading at $100 may be priced at $5. As a standard-option contract represents 100 shares, the option price has to be multiplied by the number of shares represented by one contract; this is known as the option multiplier. In this case, one contract would cost the investor $500. But what if an investor only has 50 shares and wishes to hedge this long option?

Acquiring a standard contract means that the investor would be paying a hefty premium for extra protection that they do not need. The mini option is suitable in this case, since the investor can buy five mini-option contracts. Since each mini option represents 10 shares, the option multiplier here is 10.

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

Pros and Cons of Mini Options

Mini options provide a number of advantages for investors, but they do have some drawbacks.

Pros

• Lower outlay: The biggest advantage of mini options is that they require a much lower cash outlay, approximately one-tenth of the amount required for a standard option.
• Especially suitable for hedging odd lots: Many investors have odd lots (i.e., fewer than the standard lot of 100 shares) of stocks that trade in the triple digits. Mini options are especially suitable for hedging these exposures most effectively, particularly for strategies like buying protective puts or writing calls where it is necessary to offset the exact number of shares held.
• Good tool for those with limited capital: Mini options are a good investment tool for those with limited capital, such as students and small investors, to trade very high-priced securities.

Cons

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

The Bottom Line

Mini options provide another way for traders and retail investors to hedge smaller share amounts. They differ from typical options contracts in that they are based on an underlying lot of 10 shares rather than 100. Mini options are available on benchmark indexes, although they were once available on a handful of major companies for a short time. Remember that options trading entails significant risk, so it's worth learning all you can about these contracts before you trade.

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