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The Tenacious Trader
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I am a securities trader who holds a BSIT degree and an MCSE certification from Microsoft. I consider myself to be a buy-side analyst and investor who favors a mix of quality dividend paying stocks and individual corporate bonds. I often utilize options strategies to make stock trades and/or to... More
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  • Baby Options 0 comments
    Mar 21, 2013 6:56 PM

    Recently, new mini options contracts began trading on five of the largest, listed securities: Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) SPDR Gold Shares (NYSEARCA:GLD) and the SPDR S&P 500 ETF (NYSEARCA:SPY). As opposed to their larger parents, which represent 100 shares of the underlying securities, these new offspring cover only ten shares of the underlying securities.

    These new "options" offer individual investors even more options when it comes to investing their hard-earned monies. For those who still believe in the investment premises of the aforementioned securities, the new minis offer even more choices for ways to invest and to insure one's portfolio. For example, at present, an individual investor interested in purchasing a few shares of AAPL can now sell an out-of-the-money Put, collect the premium and wait to see if Apple's shares go on sale. Not sure what all of that means; well, let's put it in a visual context for you.

    (click to enlarge)

    Presently, AAPL is trading for @ $453.00 per share. If an investor were to believe that AAPL at $450.00 (or $445.00) per share were to be a good deal, then he or she could sell an out-of-the-money April (APR) 450.00 Put for 10.35 per contract (8.55 per contract for the APR 445.00 Put). As such, the investor collects a premium worth $103.50 (10.35 x 10 shares = 103.50) for the APR 450.00 Put, or $85.00 (8.55 x 10 = 85.50) for the APR 445.00 Put. If the investor does not exit the trade (i.e. the contract) prior to the expiration date (i.e. April 19th in this case), he or she keeps the premium, regardless of AAPL's share price on that date.

    (click to enlarge)

    If, on the expiration date, AAPL is trading at 450.00 or higher (445.00 or higher in the case of the 445.00 Put), then the contract "expires worthless" and nothing further happens. If, however, AAPL is trading at a price of 449.00 or lower (444.99 in the case of the 445.00 Put) then the investor is obligated to purchase ten shares of the underlying security (AAPL in this case) for the contracted amount (i.e. 450.00 in the case of the 450.00 Put, or 445.00 in the case of the 445.00 Put).

    The nice feature about the new minis is that an individual investor can now employ the same strategies that institutional and more well capitalized investors employ. Instead of committing to purchasing 100 shares of Apple's stock at a price of $45,000.00 (450.00 x 100 = 45,000.00), an individual can now pick-up ten share of Apple's stock for less than $4,500.00 (450.00 x 10 = 4,500.00). Why less you ask? Because you collected a premium of $103.50 when you sold the Put, which reduces the total purchase price to $4,396.50 (4,500.00 - 103.50 = 4,396.50). Please take note that none of the above figures take into account broker commissions and/or fees.

    Note: Chart & options information compliments of optionsXpress

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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