Standard covered call writing contracts consists of 100 shares deliverable. When we sell one standard covered call contract we are agreeing to sell (deliver) 100 shares. Since many retail investors lack the capital to first buy 100 shares of expensive underlying securities or even the options themselves, new products known as mini options were created.
Mini options are an options class that carries a deliverable of 10 shares of the underlying with similar strike prices and expirations as the standard contracts. Initially, there were 5 equity/ETF underlyings:
GOOG has since been removed from this list
How are minis different from standard options?
- Trading symbols will differ as the suffix of “7” is added (AAPL7, for example)
- Minis deliver 10 shares, not 100
- Total value per Mini is 1/10 of the standard contract with the same strike and expiration
Commissions will doom Minis
I wrote an article on these products before they were initiated and expressed my concern for trading commissions per share. My hope was that brokerages would reduce standard trading commissions so they wouldn’t have a major negative impact in our option-selling profit…they did not.
AAPL options chain as of 10/25/2016 for the 11/18/2016 expiration
We see that with AAPL trading at $117.47, the $118.00 near-the-money strike returned $2.75 per share for a 4-week obligation. Let’s assume a total $20.00 commission to buy the shares and sell one options contract.
Calculations for the standard options contract
($275.00 – $20.00)/$11,747.00 = 2.2%
Calculations for the Mini options contract
($27.50 – $20.00)/$1174.70 = 0.64%
The impact of the commissions reduced the initial profit by 71%
The creation of equity mini options was doomed to failure because of the impact that trading commissions have on the bottom line. In essence, we are paying ten times the commissions per share with minis. This is an unworkable scenario. As a result, GOOG has stopped trading Minis and option liquidity is extremely low and in some cases non-existent for the other underlyings. I see no way for these products to be sustained and expect them to disappear in the near future.
Upcoming live events
1- April 13, 2017 (changed from April 6th)
Alan will be interviewed on Benzinga Pre-market Radio Network regarding the best strategies to use in the current market environment.
Information and link to follow
2- April 12, 2017
3:30 – 4:30
Income Generation Webinar for the Options Industry Council
Global stocks rose this week. West Texas Intermediate crude also advanced to $50 from $47.80 last Friday. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), held steady at 12.37. This week’s reports and international news of importance:
- The United Kingdom formally began the process of withdrawing its European Union membership this week by triggering Article 50 of the Lisbon Treaty. The UK and EU now enter into a two-year negotiation
- After suffering a severe defeat in his first major legislative initiative, President Trump is likely to turn his focus to taxes in the hope of unifying the Republican congressional caucus
- That may be more difficult than anticipated as the approximately $1 trillion in savings over 10 years that was expected from the repeal of Obamacare and its replacement with the American Health Care Act (AHCA) is now off the table
- Trump must now decide whether to risk further political capital by advocating an ambitious comprehensive tax reform plan or to play it safe and advocate a smaller program of tax cuts. Should negotiations drag on, markets may not receive the fiscal stimulus that they’ve been expecting this year. Some fear stimulus could be smaller than expected and later in arriving, perhaps not until 2018
- 4th quarter US gross domestic product was revised up to a 2.1% annual rate this week from an earlier 1.9% stat
- Corporate profits showed healthy growth of 9.3%, though the persistent US trade deficit restrained economic growth. Sluggish growth is expected to persist into the first quarter of 2017
- South African president Jacob Zuma fired his market-friendly finance minister Pravin Gordhan this week in a move that risks prompting a downgrade of the country’s sovereign debt ratings
- A leaked draft of a US Department of Commerce memo this week showed that the Trump administration will seek quite modest changes to the North American Free Trade Agreement, countering more extreme proposals made on the campaign trail by President Trump prior to his election
- Unemployment in Germany, Europe’s largest labor market, fell to a post-reunification low of 5.8% in March, as joblessness fell by 30,000. That was more than the 10,000 that economists had predicted
- Former South Korean president Park Geun-hye has been arrested and jailed over corruption allegations. A snap election to replace Park will take place on May 9th.
THE WEEK AHEAD
MONDAY, April 3rd
- Markit manufacturing PMI March
- ISM manufacturing March
TUESDAY, April 4th
- Trade deficit Feb
- Factory orders Feb
WEDNESDAY, April 5th
- ADP employment March
- Markit services PMI March
- ISM non-manfacturing March
THURSDAY, April 6th
- Weekly jobless claims 4/1
FRIDAY, April 7th
- Nonfarm payrolls March
- Unemployment rate March
- 10 am Wholesale inventories Feb.
For the week, the S&P 500 moved down by 0.80% for a year-to-date return of 5.53%.
IBD: Uptrend under pressure
GMI: 4/6- Buy signal since market close of November 10, 2016
BCI: I am currently moving slightly more defensively until political issues calm, resulting in favoring in-the-money strikes 2-to-1..
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to a cautiously bullish outlook. In the past six months, the S&P 500 was up 10% while the VIX (12.37) declined by 6%.
Wishing you the best in investing,
Alan (firstname.lastname@example.org) and the BCI team