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Clayton Rulli
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Has 14 years of investment experience. Holds Bachelors Degree in Business and minor in Economics. Holds special interest in options trading and hedging strategies utilizing options. Resides in the USA The best way to contact Clay is here at SA messaging.
  • Mini Options: Finally An Affordable Derivative For Average Investors 0 comments
    Mar 18, 2013 3:15 PM | about stocks: AMZN, GLD, GOOG, SPY

    On March 18th 2013, the US stock exchange will launch a new breed of option products, primarily aimed to please the small investor who cannot afford regularly priced option contracts. The "minis", which will be valued at 1/10th the size of a standard option contract, will initially be available for Apple Inc (OTC:APPL), Inc (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG), SPDR Gold Trust (NYSEARCA:GLD), and the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).

    This new class of options increases the opportunity for small time investors who simply cannot afford 100 shares of these high profile names, or simply want to invest in outright calls or puts that do not quantify as hedging for the 100 shares. Instead of controlling 100 shares of equity, the minis will control just 10, allowing for greater affordability by the average investor without a huge bankroll.

    Many investors often hold a relatively small number of shares in these stocks, and minis provide them with the ability to both hedge and write options on their holdings, said Andy Nybo, head of derivatives at research firm TABB Group.

    My Take:

    I am excited about these products as it makes utilizing popular strategies as "in the money bull calls", or the popular "covered call" finally "doable" for small time investors such as myself. For example, look at the AAPL July 400 Strike Call, which just several weeks ago I was considering buying in hopes of playing an AAPL bounce, due to the fact that it's strike price is in the money and has plenty of time until expiration.

    Currently, this contract is priced at 55.06, which would mean it costs $5,506 to get long this contract ( 55.06 x 100 shares ). I decided this 5 k is way too much for me, since such a high percentage allocation would be committed to just this one, risky position. However, the mini version would be priced very similarly, but would probably cost in the neighborhood of $505 instead, since it would harness just 10 shares, not 100. ( 55.06 x 10).

    This $500 is much more appropriate for someone looking to mitigate risk through proper investment allocating, such as myself. Similarly, covered calls are finally considerable for these high priced stocks. I would never dream of owning 100 shares of GOOG @ 800/share, or $80,000 worth. But now, $8,000 @ 10 shares seems to fit the bill for an investor with minimal capital.

    These option minis are like a dream come true for many investors, and it will be interesting to see how these contracts trade starting Monday. Also, it will be noteworthy which equities are additionally included into this class of mini options going forward. For more information, visit CBOE/MINIS, their site is excellent.

    Disclosure: I am long AAPL, SLW, SAN, GE, EPD, CCI, VZ, SLRC, OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I man initiate mini option positions in any of the stocks mentioned in this article at any time.

    Themes: options, dont-tag-as-pro Stocks: AMZN, GLD, GOOG, SPY
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