What if shares of Apple (Nasdaq: AAPL) cost $50 instead of
Even small investors could easily buy a few shares each month
and build a sizable position over time - instead of being forced
to buy $500 at a time.
Well, that's exactly what happened in the options world. Back
in late March the Chicago Board of Trade (
) launched mini options in Apple, Amazon (Nasdaq: AMZN), Gold (
), Google (Nasdaq: GOOG) and the S&P 500 ETF (
Before then, you had own 100 shares each of these high priced
companies or ETFs if you wanted to use a safe options strategy
like selling covered calls. (More on covered calls in a
So a 100-share lot of Apple would cost more than $50,000 at
today's price, putting it well beyond the reach of most
But a mini option allows you to buy 100 shares of the
lower-priced stock. This essentially lets you to use options on
the equivalent of just 10 regular shares. For a stock like Apple,
that means you only need a $5,000 investment in order to use
And that means an investor who owns just 10 shares of Apple
could use mini options to completely hedge a position or to
generate extra income by writing a covered call.
How to Use Mini Options
Before the introduction of mini options, an investor with only
10 shares of Apple could not buy an out-of-the-money put to hedge
a position or write a call option against shares without
incurring unreasonable risk.
Let's look at the example of an investor - let's call her
Paula - who owns 10 shares of Apple.
As of just a few months ago, it was practically impossible for
Paula to earn income using covered calls. But today Paula can
write a mini call option against her 10 shares of Apple, and
collect $36.50 on the sale of an October 560 Apple mini call
If we again assume that Apple rises to $570 and the buyer of
the mini call option exercises his right to buy 10 shares of
Apple at $570, Paula delivers her 10 shares and that is the end
This is a low-risk way for Paula - or any other savvy investor
- to generate monthly income. If Paula sold the October 560 Apple
mini call option and Apple shares do not hit $560 before October
18th, the mini option expires worthless and Paula pockets the
$36.50 option premium she received. Paula can then write another
covered mini call option for November and do it all over
Sounds great right. So what's the risk?
This is the worst case scenario. Let's suppose Paula
originally bought her 10 shares of Apple at $470 and after
selling an October 570 mini call option at $3.65. Apple
shares subsequently tank. Paula has reduced her cost basis for
her Apple position by the $3.65 she received from the sale of the
Paula will not be losing money until Apple falls below
$466.35, which gives her a bigger cushion to ride out the ups and
downs of being a long-term investor.
As you can see from the examples above, mini options give
investors with smaller investment accounts the tools they need to
generate additional income and reduce risk in some of the
high-priced shares they own as odd lots.
To trade mini options, investors must open an options account
with their broker. Investors should be sure they are authorized
to write covered calls when they set up their options account so
they can take advantage of this very conservative,
Mini options trade exactly the same way as standard options
do. But, because they are new, they are available only for the
five tickers listed above and they are less liquid than standard
options, which are widely used by institutional investors to
manage risk and to generate income.
But once individual investors realize how useful mini options
can be in improving their investment performance, I think they
will become much more popular and the demand for new mini option
names will grow exponentially.