Two Options Products That Could Be Right For You
One of the amazing benefits of options is the variety of ways they can be used. All different types of strategies and goals can be achieved by mixing and matching options contracts.
What’s more, exchanges continue to release more and more types of options products. New products come in all shapes and sizes and are designed to meet the needs of both retail and institutional traders.
Here are two non-standard options products that you may not have heard of…
To start with, the CBOE recently released mini options.
Mini options were designed to add flexibility to investors who trade expensive shares, such as Apple (AAPL) and Google (GOOG). In general, the average investor doesn’t hold these types of stocks in the same quantity as cheaper names.
For instance, GOOG is trading over $800 per share. With a price that high, it’s reasonable to assume investors may only have 10 shares of GOOG in their portfolio.
A traditional option equates to 100 shares of the underlying. As such, it makes it difficult for someone holding just 10 shares to accurately hedge, write a covered call, or use any option strategy efficiently.
Mini options solve the problem by equating to just 10 shares of the underlying. Essentially, the mini option is the same as a traditional option, but the deliverable is 10 shares instead of 100. (That means the price multiplier is 10x instead of 100x – so keep that in mind when looking at mini options’ prices.)
Another product listed on the CBOE, and elsewhere, is the binary option. Binary options, or binaries, are basically a very pure way to use options to play market direction. They either pay out in full – or pay nothing at all.
In most cases, binaries either pay out $100 at expiration or zero. In the case of a call, if the underlying closes at or above the strike of the binary option, it pays out $100, otherwise it’s zero. For the put, it’s the same principal except the payout comes in full if the security expires at or below the strike.
Basically, binary options are used by investors who have a strong opinion of an underlying security’s direction – and are looking for a straightforward way to act on that opinion using options.
The price of binaries will fluctuate between $0 and $100 up until expiration as the probability of expiring above/below the strike price changes. However, at expiration, the price will always be either $100 or nothing.
Mini options and binaries are just a few of the interesting option products available. Plus, more products are being introduced all the time. You may want to keep an eye on what products are available, because one could be perfect for the way you trade.
Yours in Profit,
Gordon Lewis
Category: Options Trading
