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Mini Options- A New Product For Retail Investors

There is a new options product that will begin trading on March 18th which has the potential to add great flexibility to our covered call writing strategy. They are called mini options and I’m excited to present this information to you because the product is geared to average retail investors (aka Blue Collar Investors) like us. Like all new products we must take our time to evaluate the efficacy of instituting them into our portfolios but the potential initially seems quite positive to this investor.

What is a mini option?

These are contracts that deliver10 shares of an underlying security, whereas standard contracts deliver 100 shares. They will have the same expiration dates and strike prices as the standard contracts. The International Securities Exchange (ISE) also expects the bid-ask spreads to be the same. We’ll see about that. These new products are not superior to their standard counterparts, just smaller with reduced risk and reduced reward.

What will the commissions be?

Right now, I would frame this as a big unknown. I haven’t received a firm response from the exchanges or brokerages I have contacted. One would hope (expect) that the commissions would be 1/10th of that of the standard contract but there are no guarantees at this time.

What are the available underlying securities and why were they selected?

It appears that the exchanges are requiring underlying stocks and ETFs to have a minimum price of $100 or more and an average daily trading volume of  10,000 shares/day over the past 3 months. In addition to these requirements, the exchanges surveyed various brokerages to see which tickers tended to trade in odd lots or fewer than 100 shares. For example, according to TD Ameritrade, 77% of executions with AAPL occur in odd lots. Here are the 5 securities that will be trading mini options as of March 18th:

  • Apple Inc. (AAPL)
  • Google Inc. (GOOG)
  • Amazon.com, Inc. (AMZN)
  • SPDR S&P 500 ETF Trust (SPY)
  • SPDR Gold ETF (GLD)

Here are a few potential additions in the near future but NOT available initially:

  • Master Card Inc. (MA)
  • Visa Inc. (V)
  • Priceline.com Inc. (PCLN)
  • Netflix Inc. (NFLX)
  • Chipotle Mexican Grill Inc. (CMG)
  • Goldman Sachs Group Inc. (GS)
  • iShares Barclas 20+ Year Treasury Bond Fund (TLT)

Sample portfolio with under $50 thousand

I created a hypothetical portfolio assuming a cash balance under $50 thousand using the BCI requirement of equal cash allocation and current bid-ask spreads with 3 weeks remaining until expiration of the March contracts:

 

Covered call writing and mini options

Mini Options: Sample Portfolio

Benefit to Blue Collar Investors

Since the average portfolios of retail investors has between $10,00 and $50,000 in assets, the mini options will allow many of us to trade with high-priced underlying securities. For example, to sell a covered call on AAPL, we would currently have to purchase 100 shares at about $500/share or invest $50,000 before we could sell the option. That one trade would create too much risk for most of us and prevent appropriate diversification. With minis, we could purchase just 10 shares for $5,000, sell the mini call and have plenty of cash left over for additional positions.

Potential pitfalls/why wait

As I stated at the beginning of this article, I am truly excited about these new products. However, I would not jump in right away for the following reasons:

  • The commissions involved have not been published by the brokerages. My hope is that they will reflect 1/10 that of standard options but only time will tell
  • Since option liquidity plays a major role in bid-ask spreads, this will be another unknown until the minis actually begin trading
  • We must familiarize ourselves with the new tickers to make sure we are entering the correct tickers when entering a trade. You’re probably sick of hearing me say this but paper-trading a new product first makes good sense to this investor
  • We must be sure that the brokerages, market makers and market vendors are prepared for the March 18th launch. Let’s allow others to be the guinea pigs and then we can jump in once the “bugs” are ironed out.

Conclusion

The new mini options appear to be a product that will benefit average retail investors. It will allow us to trade high-priced securities while still properly diversifying as well as allowing for balanced cash allocation. However, it is prudent to wait a bit for the launch of these new products and then re-evaluate their value to us a few months down the road.

 March Events:

March 7th: I will be hosting a webinar for The Money Show on Thursday @ 4:30 PM EST. Admission is FREE. Here is the link to register:

http://goo.gl/ooM52

March 21st: I will be presenting a live seminar for the South Florida Options Trading Meetup @ 6PM EST. The club charges a pre-registration fee of $5 and $10 at the door. This presentation will consist of a basic overview of covered call writing PLUS a new seminar I just wrote focused specifically on exit strategy execution. Here is the link to register:

http://www.meetup.com/options-fl/events/99584332/

Changes and additions in May:

  • Just added: Las Vegas Money Show, May 13-16, at Caesars Palace (details to follow)
  • Plainview, NY presentation moved from May 14th to May 23rd (this will be a professionally filmed presentation) 

Market tone:

Many market analysts were pleasantly surprised that the market was up for the week despite our government’s failure to circumvent the $85 billion in across-the-board budget cuts known as the sequester. In addition to that, the markets seemed to have absorbed the renewed threat of the European debt crisis after the surprising results in Italy’s recent elections. All this, combined with the recent payroll tax hike, did not deter our stock market from making a modest increase this past week. Here are the economic reports from last week: 

  • GDP for the 4th quarter, 2012 came in at +0.1%, higher than the estimated (-) 0.1%. A decrease in defense spending in anticipation of budget cuts was mainly responsible for holding back a better result 
  • Particular strength related to GDP included business spending (+0.9%), trade (+0.4%), consumer spending (+1.1%) and government spending (+0.8%) 
  • For the year 2012, GDP rose by 2.2%, meeting the average since the recession of 2008 
  • The ISM Index (an indicator of overall factory-sector trends, based on a survey of purchasing managers at several hundred manufacturing firms in a variety of industries. An index reading above 50 indicates that the manufacturing economy is generally expanding; below 50, that it is generally declining) was quoted @ 54.2 above the 52.5 expected 
  • According to The Conference Board, Consumer Confidence rose to 69.6 well above the 61.0 anticipated. Analysts attribute the positive outlook, in part, to increasing home values and rising financial markets 
  • The median price of new homes is now rising at the best pace since 2008

For the week, the S&P 500 rose by 0.2% for a year-to-date return of 6.9%, including dividends.

Summary:

IBD: Market in correction

BCI: Cautiously bullish but taking a protective stance favoring in-the-money strikes until sequester issues are resolved

Wishing you the best in investing,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

 

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

6 Responses to “Mini Options- A New Product For Retail Investors”

  1. Phil March 2, 2013 9:27 am #

    Alan,

    Does your webinar on Thursday include a discussion of exit strategies? I can really use some help in that area. Thanks.

    Phil

    • Alan Ellman March 3, 2013 4:05 pm #

      Phil,

      There WILL be a discussion of exit strategies in the latter portion of my presentation. I will mention all the available exit strategy choices and give examples of two of them.

      Alan

  2. Barry B March 2, 2013 4:11 pm #

    Premium Members,

    The Weekly Report for 03-01-13 has been uploaded to the Premium Member website and is available for download.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The BCI Team

  3. Gene March 3, 2013 11:28 am #

    Any update on whether weekly options are a viable tool for the BCI Methodology?

    • Alan Ellman March 4, 2013 11:39 am #

      Gene,

      We firmly believe that the SAME screening process that makes our premium stocks great monthly covered call candidates also make them eligible weekly candidates. For the last several months my team has been monitoring our premium stock reports to see how many candidates also have weeklys associated with them. Right now that number is under 5 per report many times lower than that. But as more products are added (as with the minis I wrote about in this article) that number will grow. BCI started reporting ETFs with weeklys a few months ago and will add stocks with weeklys in the near future.

      These positions will rquire more monitoring but may result in slightly higher returns. In the screenshot below is one of our premium stocks with weeklys…LNKD. I have highlighted the current options chain as of 11:35 AM EST on Monday. Here are the potential results for a 5-day return:

      $170 strike: 1% with 1.9% protection OF THAT PROFIT

      $175 strike: 1.3% return with 1% upside potential

      There is a HUGE demand for options and so we anticipate the list of our premium stocks associated with weeklys will grow over time. Click on image to enlarge and use the back arrow to return to this blog.

      Alan

  4. Barry B March 9, 2013 6:04 pm #

    Premium Members,

    The Weekly Report for 03-08-13 has been uploaded to the Premium Member website and is available for download.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The BCI Team

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