Lately, investors in Apple Inc. (NASDAQ:AAPL) have faced a dilemma. With the stock down as much as 30% from its highs last year, value investors look at highly attractive multiples on Apple Inc. (NASDAQ:AAPL) as reason to buy. Yet given how many momentum investors the stock attracted on the way up, it’s reasonable to fear the impact that they have had on the way down.
If you’ve been looking for a way to manage your risk with Apple, you’ve faced a big challenge. But now, a recent innovation from the options market could give you the answer to that challenge. Let’s take a closer look.
Announcing new mini-options
Many investors see options as being risky in all circumstances. Used properly, though, options can actually reduce risk by allowing you to define exactly how much exposure you want to a stock’s price movements.
But with Apple Inc. (NASDAQ:AAPL) and a host of other companies, the structure of traditional options contracts has been a barrier to using options for risk management. Historically, options contracts covered 100 shares of the underlying stock. For many stocks, that number of shares corresponds to stock with a value measured in the hundreds or thousands of dollars. Yet with Apple Inc. (NASDAQ:AAPL), 100 shares of stock is currently worth $45,000 — a much larger position than most investors want to take.
In response to the demand for options on companies with high share prices, options exchanges have released so-called “mini-options” on five different securities. Along with Apple Inc. (NASDAQ:AAPL), fellow tech stocks Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG) will have options contracts available that cover just 10 shares of stock rather than the usual 100. In addition to those individual stocks, two ETFs will also have mini-options available: SPDR Gold Trust (ETF) (NYSEARCA:GLD) and SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
How can mini-options help you?
The solution that mini-options provide is that they allow you to match up your stock exposure in executing popular options strategies. For instance, neither Google nor Amazon pay a dividend, making the stocks less attractive for income investors. But by using what’s known as a covered-call strategy, you can write a call option that commits you to sell your shares to the option-buyer at a specified price for a certain time into the future. In exchange for making that commitment, you receive an upfront payment called the option premium.