Last week, the CBOE (Chicago Board Options Exchange) announced that it will be offering mini-option contracts – representing just 10 shares not 100 – beginning March 18.
This new kind of contract will be available on five stocks and ETFs but I expect them to be wildly popular and offered on a large number of stocks and ETFs in short order. The first five are:
• The GLD (GLD) – the ETF for gold
• The SPY (SPY) – the ETF for the S&P 500
• Amazon.com (AMZN)
• Apple (AAPL)
• Google (GOOG)
I expect brokerage houses to reduce their fees on trades involving mini-options. This could greatly reduce the transaction costs associated with selling or buying options. Is this optimism misplaced? My online broker, OptionsXpress (owned by Schwab), is one of the most expensive of the online brokers but recently introduced very aggressive pricing on a different something similar, mini-future contracts.
Big benefits for retail investors
The other potential impact on retail investors is on the ability of smaller accounts to sell options against these high-priced stocks. The typical account holding or selling options, according to various industry sources, has between $10,000 and $50,000 in capital. High-price names cannot be traded in these kinds of accounts – until now.
For example to sell a covered call on Apple – one of the great income strategies of all time – used to require capital to own 100 shares, or roughly $45,000 – to sell open contract. That is now cut to $4,500.
This combination of reduced capital requirements and commissions is a boon to retail investors, especially those looking to generate consistent income from a put-and-call selling strategy.
More importantly for options sellers – that is all we do in Options Income Blueprint – the volatility of these large stocks will filter down to the mini-options. And Amazon, Apple and Google are relatively volatile stocks with options that carry fat premiums on their calls and puts. Sell puts on these names – every week or every month – and you can generate yield between 15% and 25% per year, something that would not have been available to the typical account before the creation of these mini-options.
What to do right now? Nothing – except contact your broker to see if and when they are reducing commissions on mini-options trades. You may also want to become familiar with these five stocks and ETFs. I have followed the three stocks for more than a decade; everyone follows gold and the S&P 500. Do nothing right now; the impact of the mini-options on stock and options prices is a true unknown. I do expect volume and volatility to go up and the selling of puts and covered calls to be more lucrative as soon as the mini-options become available.