Mini Options make trading high priced stocks more accessible

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Mini Options TradingThe International Securities Exchange (ISE) released Mini Options Trading on Monday 18th March. This is the first exchange to provide such a product, which is hoped to entice more investors into high priced stocks such as Apple Computers (AAPL), Amazon (AMZN), Google (GOOG) as well as Exchange Traded Funds (ETFs) such as Gold Trust (GLD) and the S&P500 (SPY).

An Option is a contract to buy or sell shares, at a set amount, during a set time-frame.

So for example, let’s say you think shares of Apple Computers are cheap at the moment and you expect the share price to rise over the next 6-months. You could purchase the stock at the current price of $454.49 per share, or you could purchase a Call option giving you the right (but not the obligation) to buy shares some time between now and the end term of the contract (a set date in the future).

Options are used in various forms throughout society. The Property market has Options which are used for purchasing at a later date, rather than putting the money down straight away. Even the “Layby” system used at department stores such as Sears or K-Mart is a form of an option. In both scenarios, you put down a deposit, referred to in Options as a Premium, and will pay a set amount by a set time in the future. If you no longer want to take on the purchase, you will lose your deposit (premium) but have no more obligation.

History shows us that Options have been around for century’s. However, the first US Options exchange started in 1973 with the formation of the Chicago Board of Options Exchange (CBOE). Since then, Options trading has become one of the most popular methods in accumulating shares, protecting portfolio’s, and creating an additional income stream from stock investments.

For both the US and Australia, listed Option contracts have standardized terms. One Options contract gives the buyer the right, but not the obligation, to Buy or Sell 100 shares at a set price on or before a set date in the future. But the release of “Mini-Options” this week could change the marketplace for years to come.

On Monday the 18th March, the ISE released Mini Options on 5 leading stock and Exchange Traded Funds (ETFs). The difference between a standard Options contract and a Mini Option is that the new contracts give the right to buy or sell 10 stocks per option contract, not 100.

Although the price of the options will trade at the same premium value, fulfilment of the options will only be at a tenth of the number of shares. This means the trader or investor will only need to use a tenth of the capital to enter into a position.

Following is an example of Apple Computers to compare:

Underlying

Details

Number of shares/options

Value

AAPL

$454.49

100

$45,449.00

Near the Money (Standard) Call Option

April 455.00 Call @ $14.50

1

$1,450.00

Near the Money Mini Call Option

April 455.00 @ $14.50

1

$145.00

 

The Near The Money standard Call Option costs $1,450 to have the right to buy 100 shares of AAPL at $455 by expiration. Whereas the same Mini contract will only cost $145 to buy 10 shares of AAPL at $455 by expiration. Both are cheaper alternatives to buying 100 shares at market, limiting the initial exposure risk of having so much capital in the market.

So in conclusion, if you were finding stocks such as AAPL and GOOG a little too expensive to buy at their current prices, you have the alternative of purchasing an Option contract. But with the release of Mini Options from the ISE, there is now the ability for investors with small amounts of money to still gain exposure to these stocks.

Mini Options will gain momentum as time passes, and liquidity will only increase. We expect these to become a popular method for investors to get exposure to stocks that are otherwise priced out of their ability to buy. And as their popularity increases, more and more Mini Options will become available on leading companies.

If you would like to know more about Options and how you can make money from the markets no matter whether they are rising, falling or trading sideways, visit Australian Investment Education (AIE) to learn more. CLICK HERE

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...
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