JLN Options: Commentary: Duelling Proposals for Mini Options by ISE and NYSE Arca

Apr 18, 2012

Duelling proposals for mini options by ISE and NYSE Arca

Last week in the JLN Options newsletter and the John Lothian Newsletter, we broke the announcement that NYSE Arca had filed a proposal with the SEC to offer mini options. The International Securities Exchange (ISE) has also filed a competing proposal to offer mini options.

The two proposals differ in substantial ways.

For one, ISE and Arca list slightly different underlying stocks for inclusion in the mini options contracts. ISE is proposing mini options on: Apple, Inc., (AAPL), SPDR Gold Trust (GLD), Google, Inc. (GOOG), Amazon, Inc. (AMZN), International Business Machines (IBM), and Priceline.com, Inc. (PCLN). NYSE Arca’s lineup is: SPDR S&P 500 (SPY), Apple, Inc. (AAPL), SPDR Gold Trust (GLD), Google Inc. (GOOG), and Amazon.com Inc. (AMZN).

Both proposals are designed to offer options of reduced value and size on some underlying securities that are particularly expensive and heavily traded. Apple stock, for example, is trading at slightly over $600 a share today, as is Google. As Arca mentioned in their announcement, the options on pricey underlying securities can be expensive as well, and even a small percentage move in the underlying share price can mean a large movement in the value of the option.

Arca has proposed mini options on underlyings that are priced greater than $100 per share and have an average daily volume of at least 45,000 contracts over the previous three months. ISE’s proposed threshold is at least 10,000 contracts over three months, and the price must be at least $150.

The new contracts are designed to appeal to retail traders/investors who may not be able to trade options on the higher-priced securities, according to ISE’s filing. ISE proposed options would have the same terms and contract characteristics as the regular sized equity and ETF options, including exercise style.

ISE proposes that the premium multiplier will be 10 rather than 100, but the strike price will remain the same. In contrast, Arca will reduce the strike price for the minis but keep the same premium multiplier for both contracts. Both exchanges will designate the minis with a different trading symbol to avoid confusion with the standard contract.

According to NYSE Arca’s filing, the SEC has approved an earlier proposal of theirs to list option contracts overlying a number of shares other than 100. The filing notes that the idea is not novel, and that paired products on a full-value and a reduced value basis are currently listed on the S&P 500 Index, the Nasdaq 100 Index, and the Russell 2000 Index.

Both proposals have been filed at the SEC and are awaiting comment.  — Sarah Rudolph

John Lothian Newsletter

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