Cboe Mini options are designed to track the underlying symbol accordingly, but at one-tenth of the price.
Minis are comparable to their ETF counterparts but carry a couple potential advantages.
These products may provide greater flexibility for new index options traders.
Building a smaller account can be a thrilling adventure, full of promise and opportunity. But it can also be an effort fraught with frustration, as some potentially tantalizing investment paths can seem blocked to those without the current means to employ pricier strategies. For some smaller investors, index options fall under these potentially unobtainable approaches. “Nice idea, but I can’t afford it, right now,” they tell themselves. “Maybe someday.” Maybe.
Or maybe someday is today.
Before exploring this topic, it’s important to note that options trading entails significant risk and is not appropriate for all investors. TD Ameritrade and Cboe are separate, unaffiliated companies and are not responsible for each other’s policies or services.*
Mini Index Options: A Big Tool for the Smaller Portfolio
The relative affordability of an investment strategy is just a fact of life for the self-directed investor. And as traditional index options are derived from comparatively higher-value underlyings, they can be prohibitively expensive for some. For this reason, Cboe Global Markets, Inc. (Cboe) created investment vehicles designed to make options accessible to the smaller portfolio. These options are known as “Minis.”
Take, for example, the Cboe Mini-SPX contract. This contract, known and charted by its symbol XSP, is an index options product designed to track the underlying S&P 500 Index. The construction of XSP is straightforward: It tracks at exactly one-tenth the size or value of the SPX, and its options are priced accordingly (see Figure 1). To explore this a little further, let’s suppose SPX is currently at a level of 4500, and its at-the-money (ATM) call is trading at $50. With an options multiplier of 100, a single contract would represent a $5,000 investment for the call buyer, which may price out many smaller accounts. In this event, the XSP may offer a more affordable alternative, as it will be valued at precisely one-tenth of SPX, or 450, and its ATM call will be exactly one-tenth the price of the SPX call, or just $5 in this case. Cboe’s Mini-Russell 2000 (MRUT) options are similar at one-tenth the size of the Russell 2000 Index options (RUT). So, as you can see, Minis can provide greater flexibility for newer index option traders or traders managing a smaller portfolio.
FIGURE 1: The top section shows the SPX, while the bottom is the Cboe Mini-SPX contract, charted by the symbol XSP. Chart source: the thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Are options the right choice for you?
While options trading involves unique risks and is definitely not suitable for everyone, if you believe options trading fits with your risk tolerance and overall investing strategy, TD Ameritrade can help you pursue your options trading strategies with powerful trading platforms, idea generation resources, and the support you need.
Learn more about the potential benefits and risks of trading options.
But Couldn’t I Just Trade Index ETF Options?
Cboe’s Mini-S&P 500 Index (XSP) options offer investors a way to trade large-cap U.S. stocks and to mitigate portfolio risk with a smaller contract size. As these contracts are one-tenth the size of SPX index options, they are generally the same size as comparable ETF options. But Minis also carry a couple potential advantages versus their ETF counterparts. First, Minis are cash-settled, so there’s no risk of unwanted delivery of physical shares. Second, Minis are European-style options, so there is no possibility of early exercise. And finally, Minis have the potential for more favorable tax treatment, and capital gains may qualify for the 60% long-term, 40% short-term tax rate**.
Now, in addition to these unique attributes, Minis also share many of the familiar characteristics of ETF index options, such as being PM-settled, trading Monday through Friday, and having standard, weekly, and end-of-month expirations.
Trade Large Cap and Small Cap
In addition to offering Minis on the S&P 500, Cboe has also created a vehicle for those looking to leverage or hedge the movements of smaller-capitalization companies. Many investors look to the Russell 2000, or RUT, to gauge the movements of small caps, as this index is comprised of 2,000 smaller U.S.-based companies. Some traders will employ RUT options in an effort to take advantage of their personal convictions regarding small-company behavior. However, as with SPX options, RUT contract prices may exceed the position tolerances or budgets of smaller accounts. Fortunately, these investors now have the option to turn to the Cboe Mini-Russell 2000, or Mini-RUT, which is charted by the symbol MRUT. Just like the Mini-SPX, the Mini-RUT, and its options track at exactly one-tenth of their associated index value, delivering affordability and flexibility to a wider audience of traders and permitting self-directed investors access to derivatives of companies both large and small.
Remember: “Mini” Does Not Equate to “Zero Risk”
It is important to note that Mini contracts – while potentially appealing to some for their downsized cost – carry similar risks to those associated with their full-size cousins, and the would-be investor needs to prepare accordingly. For example, investment in a long Mini contract does come at one-tenth the cost of a traditional contract, but even that smaller purchase is still potentially exposed to 100% loss, just like a full-size option, should the Mini contract reach expiration out-of-the-money. Similarly, time decay diligently chews away at the extrinsic value of Minis proportionately to their size for the duration of the contract period, and an in-the-money contract can expose an investor to additional risk at expiration, just as with a traditional option. And of course, the leverage that may attract an investor to Minis can also work to that trader’s detriment, should the underlying behave in a manner opposite to the trader’s expectations. So, yes, risk is still a vital consideration when weighing the potential for employing Mini options contracts in one’s self-directed portfolio.
Learn More in Our 3-Part Webcast Series
Mini index options products can be used by option traders to gain exposure to a segment of the listed options market traditionally dominated by large account owners and institutional portfolio managers. However, there is still so much more to learn before these strategies might be intelligently implemented: What are the risks of trading Mini index options? What might be some of the fundamental or technical considerations when planning a trade? When might an investor employ a Mini as a hedge, and how might it be used for leverage? And even, how is the order entered?
TD Ameritrade has recently worked with Cboe to create and offer an entirely free, three-part video series dedicated wholly to the understanding of Mini index options. This series features TD Ameritrade Education Coach James Boyd, alongside Henry Schwartz, Senior Director and Head of Product Intelligence at Cboe. The discussion focuses on concepts and strategy considerations for Mini index options trading and how these products might provide greater flexibility for new index option traders or traders managing smaller, individual portfolios. Topics addressed in the series include market dynamics and use case examples, how to enter trades on the thinkorswim platform, position management considerations, and pitfalls and risks of trading Mini index options.
You can watch the webcast series here:
Using Mini Index Options for Income & Risk Management
S&P Volatility Index Options Considerations for a Small Portfolio
Strategies & Considerations: Mini Index Options Trading
And finally, you can learn more about Mini-S&P 500 index options or Mini-Russell 2000 index options at Cboe.com/Minis.