Over the weekend the Wall Street Journal ran an article discussing the new "Mini" options contracts available since March 18, 2013 which are gaining popularity with small retail investors.
This may be very good news for the brokers and market makers involved, but it is lousy news for small retail investors.
The idea behind the "mini" contracts is to reduce the deliverable share count for a put or call from 100 shares (the traditional amount) to 10 shares. This will allow smaller investors, who might choke on the risk of buying or selling 100 shares of AAPL, GOOG, or SPY, to speculate in those same issues via options.
I took a look at the spreads on the "mini" contracts, examining the nearby, at the money puts and calls. On SPY, the "mini" contract bid/ask spreads were anywhere from 4 to 7 cents wider than standard contracts. Spreads were 20 cents wider on the AAPL and GOOG contracts. Keep in mind, that wide spread is per contract.
Brokers will then charge the same flat commission rate plus a per contract add-on to trade these options. Rather than buying, for example, one call on GOOG, good for 100 shares, an investor could buy 6 "mini" contracts, good for 60 shares. The cost to the investor will include the flat fee, a surcharge for the six contracts, plus a 20 cent wider spread per contract than larger players will be paying.
Result is, the round trip transactions cost on this type of trade will significantly eat into any profit that might exist.
But it gets worse. The fact that these contracts are popular, and the WSJ says they were among the top 5% of most active options last Friday, means there is likely more greed and less fear in this market than is ideal. We can tuck that into our hats and keep it in mind. It's not a sign we want to see.
Most important, speculation on frothy names with high share prices is the very last thing a small account should be doing. Easy availability of these speculative devices distracts the smaller investor from the important work he or she should be doing, namely, becoming a bigger investor. Fooling with small, overpriced option contracts is no substitute for slowly accumulating well run businesses with conservative balance sheets, preferably at moments of market fear when they can be obtained at lower prices.
Super size turned out to be not such a great idea and it looks like "Mini" is no bargain either.
Disclosure: I am long AAPL. 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.