Monthly Archives: June 2013

Mini Options, Maximum Fees

The new “mini” option contracts were billed as a way to make options more affordable to the average retail trader. By reducing the number of shares each contract represents from 100 to 10, retail traders would no longer need to own 100 shares of pricey stocks like Apple or Google in order to execute a covered call strategy or purchase puts for protection. While it is true that the amount of cash or underlying stock required to execute an option strategy on the mini’s is less, their relative cost dwarfs their standard 100 share siblings.

Leading online brokers have made no alterations to their standard commission structures to accommodate the lower prices of the mini options. In the case of TD Ameritrade, A single mini contract incurs the same fees as a standard size option – $9.99 + $0.75. This makes the commission on a mini size contract as a percentage of the transaction 10x that of a standard size option. In addition, current spreads on mini’s are higher, leading to a higher price when buying and lower price when selling.

As an example – here are a few different scenarios for an investor today executing a round trip buy and sell of a $435 June 22th Put on Apple using TD Ameritrade’s current commission schedule.

Mini_Options

Option transaction costs for a retail trader on a single contract are already extremely high.  In the above example the combination of commissions and spread create a 4.5% headwind per trade, already almost insurmountable odds.  For reference, a Las Vegas casino’s edge on double zero roulette is only slightly higher at 5.3%.

If a trader purchases a single mini contract, the total cost in spread and commission surge to over a third of the initial investment virtually guaranteeing a substantial loss on the investment.  Buying multiple mini contracts does not help as for similar dollar amounts it is also a far worse deal than the standard contracts as the increased spread and commissions almost quadruples the percent of the investment lost fees.

With the odds already stacked against option traders with small accounts, the new mini options actually result in increased trading fees for retail clients.  In an industry that is looking for growth and to reassure a nervous investing public, new products should be focused on increasing a retail client’s odds of success, not reducing them.

 

 

 

 

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