Mini options struggle to maximise potential
20 March 2014
Mini options based on five of the most liquid US stocks are struggling to match early market expectations one year after launch as the products aimed at retail investors have failed to build traction, says Jonathan Watkins.
March 18 marks a year since mini options hit the US market and early signs of the products taking off have disappeared along with high hopes of the products catching on.
All the main US options exchanges, including the Chicago Board Options Exchange, the International Securities Exchange and NYSE MKT, formerly the American Stock Exchange, list the five mini options based on Amazon, Apple, Google, SPDR Gold Trust and the S&P500 Index ETF.
The contracts are a tenth of the size of standard products, which should have made them more appealing to retail investors.
The offerings followed a string of similar launches in the US, enabling clients to gain exposure to a handful of blue chip equities without the huge capital commitment of trading the underlying stock.
Small bite of the AAPL
“The mini option product has not taken off as we may have expected. In fact they make up less than 1% of our daily options trades,” said JJ Kinahan, chief strategist of TD Ameritrade.
Within a couple of months of their launch, the contracts began to gain traction reaching volumes of nearly half a million.
In December, volumes across the five major underlying stocks reached almost 700,000, with Apple seeing the lion’s share of the action.
But according to February’s data from the Options Clearing Cooperation (OCC), accumulative activity on all five contracts fell to just over 200,000.
Apple has been the most-actively traded product of the group.
The offerings were touted as an exciting new launch for retail investors in the US when they first came on the scene last year.
Launched with great fanfare
Retail customers are more likely hold a smaller number of shares in the higher-prices stocks, with Apple, for example, trading around $528 per share.
The mini-sized equivalents were therefore seen to be a better hedge for those investors with small positions.
“They were launched with great fanfare as a way to generate more options volume in expensive but retail-heavy names like Apple,” said Mark Longo, founder of the Options Insider.
Longo added that one of the problems for the minis was in relation to commissions.
“Brokers saw this as a cash grab and charged full ticket charges and commissions for this product.
“However, retail customers were rightfully outraged at having to pay full price for a 1/10 size contract.”
In an FOW article shortly after the launch, traders did suggest there may not be enough liquidity from the mini options as larger volume tends to come from professional traders and not retail investors.
Market makers were then reportedly refusing to make markets until they saw some volume, which resulted in wide spreads, compared with the standard products.
Targeting retail customers has become a growing trend in the derivatives market, with many exchanges offering specially tailored contracts to investors.
Kinahan added the limited offering may be holding back the growth of the product.
“There are only five names so for the popularity to expand, the number of names would have to expand also.
“Again, as a first step for many folks they seem to be good but without the exchanges expanding the names or one of the names having amazing news to move the underlying product the expectations of growth have to be tempered,” he said.