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Retail Investor Series: CBOE Mini-Options

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We are firm believers that every person, regardless of net worth, should have options as a part of their investment portfolio. Traders that write covered calls and/or collar against long stocks positions have a penchant for outperforming the market. There is a well-documented UMASS study that proved using options can improve performance while adding less risk relative to buy and hold strategies. Yet, the ability to use options in a smart, safe manner is often lost to the average retail investor. Here is the dilemma of the average retail investor: If one is trading a $15,000-$20,000 account, it is very difficult to employ options strategies against ETF or stock positions.

Even if you put $15,000 into SPDR S&P 500 ETF (SPY), the investor would only be able to buy a little over 96 shares of the ETF. If an investor wants to buy individual securities the problem becomes even greater. $15,000 cannot buy 100 shares of Google (GOOG), Apple (AAPL), IBM (IBM), (AMZN), LinkedIn (LNKD), AstraZeneca (AZN) and SPDR Gold Trust (GLD)...basically when we think about many of the companies we would want to buy and hold, there are very few that are low dollar stocks. Beyond that, if an investor is going to diversify, they probably would end up owning 10 to 50 shares of several stocks.

If one wants to only employ buy-and-hold strategies the above strategy is sufficient. Put whatever you buy on a DRIP, set it, and forget it (don't completely forget it, evaluate your holdings on at least a quarterly basis). But what if one wants to use options? Using options can substantially improve portfolio performance. At OptionsProfits we are HUGE proponents of education. You should never trade a product, a market or strategy that you don't fully understand. Therefore, we put a lot of resources into educating investors so they use options correctly -- to complement and supplement their core investment portfolio.

Currently there is no way for an investor to trade options on a lower dollar portfolio or against odd-lot holdings. That is about to change! On March 18 the CBOE is going to launch Mini-Option Contracts. Mini option contracts will be 1/10th the size of a standard option contract. This means that a call will give the holder the right to buy 10 shares of the underlying security instead of normal 100 shares. A put, will give the holder the right to sell 10 shares of the underlying instead of 100 shares.

Initially there will only be five securities that have Mini-options, but they are widely held by many retail investors.


Equities: AAPL, GOOG, AMZN

If the mini contracts are successful, we are almost certain the CBOE will begin listing many more of these securities. Stocks like IBM may be next on the list. Adding these contracts will allow retail investors to finally use options strategies against their portfolios. Over the next week TheStreet will publish a series of strategies the retail investor can employ using Mini-Options, once they list on March 18. Mark and I will present strategies on Mini-Options...and Jim Cramer and Russell Rhoads of the CBOE have something very special lined up for us too!

We will begin with covered call writing on our next piece.

OptionsProfits can be followed on Twitter at

Mark can be followed on Twitter at

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