What Are Mini Options?
Mini options are option contracts where the underlying security is 10 shares of a stock or exchange-traded fund (ETF). That is the foremost difference between mini options and standard options, which have 100 shares because the underlying security. Mini options aren’t any longer available for single stocks or ETFs, but mini options on indices still trade.
Key Takeaways
- Mini options, also referred to as E-Mini options, are exchange-traded options contracts which are a fraction of the worth of a corresponding standard options contract.
- Mini options are most frequently found listed on benchmark indices where the underlying asset is an E-mini index future.
- The Cboe trialed mini options on several large-cap stocks and ETFs, but these were discontinued in December 2014.
Understanding Mini Options
Mini options are currently only listed on major indices. The Cboe’s Mini-SPX (XSP), as an illustration, is an index option product launched in 1997 designed to trace the underlying S&P 500 Index. At a tenth the scale of the usual SPX options contract, XSP provides greater flexibility for brand new index options traders or traders managing a person portfolio.
The CME Group also offers Micro E-Mini options on the S&P 500 (MNQ) which are 1/10th the scale 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 next five stocks and ETFs were introduced:
The choices symbols for these mini options were modified, with the number seven appended to the symbol. Thus, the mini option series for Amazon would have began with the identifier AMZN7, while that for Apple would start with AAPL7.
These options series were discontinued on Dec. 17, 2014, not so long after their introduction, and mini options on stocks and ETFs now not trade.
Unlike mini index options, these minis had a physical settlement, which suggests that the actual shares can have to be delivered if the position isn’t closed before expiration. They were American-style, which suggests 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 must be the third Friday of the expiration month. Strike prices and strike-price intervals for mini options are the identical as for normal options on the underlying security.
Examples of Mini Options
The foremost rationale for the CBOE’s introduction of mini options was that they made it possible to take a position on or hedge fewer shares of the underlying stock or ETF.
For instance, an ordinary option on a stock trading at $100 could also be priced at $5. As a standard-option contract represents 100 shares, the choice price must be multiplied by the variety of shares represented by one contract; that is referred to as the choice multiplier. On this case, one contract would cost the investor $500. But what if an investor only has 50 shares and needs to hedge this long option?
Acquiring an ordinary contract implies that the investor could be paying a hefty premium for extra protection that they don’t need. The mini option is suitable on this case, because the investor should purchase five mini-option contracts. Since each mini option represents 10 shares, the choice multiplier here is 10.
Note that the multiplier for the XSP mini options is 100. As this feature has one-tenth the worth 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 have the next benefits:
- Lower outlay. The most important advantage of mini options is that they require a much lower money outlay, roughly one-tenth of the quantity required for an ordinary option.
- Especially suitable for hedging odd lots. Many investors have odd lots (i.e., fewer than the usual lot of 100 shares) of stocks that trade within 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’s crucial to offset the precise variety of shares held.
- Good tool for those with limited capital. Mini options are investment tool for those with limited capital, equivalent to students and small investors, to trade very high-priced securities.
On the flip side, mini options have the next drawbacks:
- Commissions are higher on a percentage basis. Commissions can really add up when trading mini options. For instance, if the commission to placed on an option trade through a web based broker is a flat fee of $10, and an ordinary contract (of 100 shares) is trading at $10, the commission works out to 1%. But when 10 mini-option contracts are used as a substitute, the commission could be $100 or 10% of the worth traded. Even when 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 appear to have much wider bid-ask spreads and significantly smaller open interest than their standard option counterparts, which translates into lower liquidity.