Courtesy of Andy Nybo, TABB Forum
The recent approval by the Securities and Exchange Commission (SEC) to allow the listing of “mini” options provides the options industry with a wealth of potential opportunities. The potential success of mini options, however, will be a double-edged sword. The costs to build out the necessary technological infrastructure to support trading of minis needs to be offset against the benefits (and revenues) they bring to options market participants, an evaluation many have yet to make.
Mini options may be simple in concept, but their very simplicity masks many of the challenges that will inevitably arise, especially if the contracts see broad trading success. On the surface, mini option products look just like their larger brethren — the “only” difference is that the deliverable size for a mini option is 10 shares of the underlying as opposed to 100 shares for standard contracts. All other facets for minis remain the same, with expirations, strikes and classes all replicating the standard contract terms. To date, exchanges have proposed listing mini options to five “high priced” stocks with a large retail following, namely Amazon, Apple, Google, the Spider S&P 500 ETF, and the Spider Gold Trust.
A number of factions have been actively campaigning behind the scenes to shape the ultimate structure of the mini options product. Not surprisingly, exchanges have taken a lead role in seeking the SEC’s blessing, with the ISE and NYSE ARCA receiving approvals in September to list the mini options on their respective exchanges beginning March 18, 2013. NASDAQ’s PHLX exchange filed for approval of its own mini products on Nov. 1 this year, and it is probably safe to assume that the other eight (or nine, depending on when you read this) exchanges are working on their own rule filings.
There is no doubt that the exchange efforts are broadly supported by retail brokers, as their retail investor clients are arguably the biggest potential end user of any mini options products. The high price of the selected underlyings prohibits the use of options by most retail accounts, which cannot afford the standard contract price. In many cases, a retail account will hold an odd lot of the stock and is shut out of using the standard contract for hedging or as a way to earn premium income.
Are We There Yet?
The major challenge is one of readiness. Although current proposals are targeting a March 18, 2013, launch date, hitting this date will depend on industry readiness to support the new mini product set. The ISE and NYSE Arca may be ready for trading on the proposed start date, but brokers, market makers and industry vendors may not have all their ducks in a row in time for the launch.
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