Should Smart Options Traders Trade Mini-Options?
In their January 2013 newsletter, the Options Clearing Corporation reported that mini-options will begin trading on March 18, 2013 for five securities in which standard options contracts have significant liquidity. The five securities are SPDR S&P 500 (SPY), Apple, Inc. (AAPL), SPDR Gold Trust (GLD), Google Inc. (GOOG), and Amazon.com Inc. (AMZN). Mini options will represent a deliverable of 10 shares of an underlying security, as compared to standard contracts that represent a deliverable of 100 shares per options contract.
One might speculate that mini-options will be attractive to the small investor and options trader as they would pay a smaller dollar amount to buy a few contracts to participate in the movement of these high-priced securities, i.e. they will pay 1/10th what they would pay for the standard contract. However, smart options traders as well as more seasoned options traders will recognize that factors other than the option price must be considered before diving into trading mini-options.
Option Liquidity and Commissions are Important
As with standard option contracts, the liquidity in an option chain will determine how tight the bid-ask spreads are (the ‘bid-ask’ spread determines the ‘instant loss’ one has when one enters a trade – see ‘Why Liquidity is Important’ for more details). Smart traders will wait to see what the liquidity is in the given option chains before making the leap to trading mini-options.
Another factor to consider is the commission structure that individual brokers will charge for trading mini-options. If one trades 10 GOOG mini-option contracts and pays higher commissions than trading one standard GOOG contract, one might as well trade the standard contract. The effect of commissions would be more important when trading multiple spread contracts, where the proceeds of selling options against the cost of buying options might diminish the cost advantage effect of only buying options contracts.
Conclusion:
To answer the question posed in the title of this post – one should wait and see. While one might anticipate that liquidity of the proposed mini-options will be higher than currently with the standard contracts, smart options traders would be prudent to wait to confirm that making the switch to trading mini-options is an advantage.
