Saturday, March 09, 2013
Apple in Small Bites
Mini-options bring some high-priced stocks and exchange-traded funds within reach of more investors. And, the Nasdaq will open earlier.
As options’ popularity has grown among retail traders over the last decade, the exchanges have responded with more products. Weekly options, introduced in 2005, have gained to the point that the top options-centric online brokers report that they comprise almost half of their options volume this year. Most expect weekly options to pass regular monthly options in volume this year.
On March 18, the exchanges will introduce mini-options on three high-priced active stocks and two exchange-traded funds: Apple (ticker: AAPL), Google (GOOG), Amazon (AMZN), SPDR S&P 500 ETF Trust (SPY) and SPDR Gold ETF (GLD). All of these equities are priced well over $100 per share, which makes it tough for most retail investors to buy them in 100-share blocks. The new mini-options will make them more affordable—representing just 10 shares of stock.
Under the traditional 100-share terms, near-the-money April calls for Apple, for example, are in the $15-$20 range for a contract, so a single call option could set you back about $2,000. If you were to write a covered call—buying 100 shares of Apple and selling the April 440 strike—you’d be looking at a price tag of over $42,000. Investors could wait for a stock split or two to make these pricey stocks easier to buy, but they’d have to wait a long time. So to keep the little guy involved, mini-options are coming.
The options-centric brokers are thrilled about mini-options. The initial launch of mini-options will be monthly expirations though most expect weekly versions to follow if volumes indicate enough interest.
“I think there is going to be demand from customers who have a hard time expressing their views in these higher dollar stocks currently. Obviously, there needs to be support from the professional trading community to make them really attractive,” says George Ruhana, CEO of OptionsHouse.
One issue is that the exchanges have not yet announced their fees. Though Ruhana expects the minis to be successful, he adds, “If they [the exchanges] make it prohibitively expensive for market makers to do business in the minis, there is a chance that the markets [price spreads] could be wider than those on the regular contracts. If that is the case, then the product will struggle.” Ruhana believes that professional market makers, such as his firm’s parent company, Peak6, should keep the spreads (the difference between the bid and ask price) fairly tight on the minis in order to make them attractive to retail traders.
Since the exchanges haven’t yet published their fee schedules, brokers haven’t announced their commissions either. I would be pleasantly surprised to see fees lowered for the mini-options, though I suspect that the commissions will be similar to, or the same as, on regular options. You can still use your broker’s analytical tools to figure out which strategy to trade, and trading odd lots of under 100 shares of stock usually generates the same commission as a regular 100-share lot.
Another change planned for March 18 is the 4 a.m. Eastern time opening of pre-market trading on the Nasdaq. NYSE’s ARCA exchange has allowed 4 a.m. pre-market trades since 2005, but having the Nasdaq step in should, in theory, bring in more volume.
Stephen Ehrlich, CEO of Lightspeed Trading, says, “The 4 a.m. Nasdaq pre-market open won’t make a huge impact right away, but I believe that it will be bigger as time goes on. The early open gathers more order flow and is primarily a benefit for traders who take an overnight position, and allows them to exit earlier in the day at a more favorable price.” Ehrlich notes that the equity space between 9:30 a.m. and 4 p.m. has become extremely crowded, and big news is usually announced after the markets close at 4 p.m. “People willing to wake up early have found that this is the new frontier,” says Ehrlich. Or on the west coast, stay up late.
Published in Barron’s, March 4, 2013.