Bookmark and Share 1, Mega and Nano Options Begin Trading

Chicago, IL, April 1, 2013 - Chicago Board Options Exchange announced today that, based on the success of Weekly and Mini options, two new option types will begin trading next month: Mega and Nano.

Mega Options

Mega options are in every respect identical to normal monthly options except that each contract controls 100,000 shares instead of the normal 100 shares.

Designed with the average retail investor in mind, Mega options allow a person to control around $45 million of AAPL stock with a single contract. "People love these things. Tossing around $45M at a time really feels good and tends to keep you interested in the game." says Mike Scanlin, CEO of Born To Sell, a covered call web site that plans to support the new Megas immediately. "As more and more investors pile into highly volatile leveraged instruments, we expect open interest of Mega options to surpass regular options in their first month. We think everyone will want to pick up 22 AAPL Megas so they can make a directional bet on a billion dollar AAPL position."

Nano Options

Nano options, on the other hand, are similar to weekly options in the sense that a single contract controls 100 shares. However, the duration has been shortened: Nano options expire 15 seconds after they have been created.

"These things really go fast" says Mr. Scanlin. "In fact, it's a good idea to fill out the closing transaction ticket prior to submitting the opening transaction ticket or else you won't have time to close out the position before it expires." This product was designed with HFTs [high frequency traders] and people with ADD [attention deficit disorder] in mind. "The HFT guys have been complaining for years that option expiration dates are too far beyond their time horizon to make them useful instruments, so the CBOE listened and designed products the market was demanding."

Margin Requirements

Recognizing that Reg-T margin requirements for options would make Mega options too difficult for average investors to own, the SEC has lowered the margin requirements to 0.00001% of the face value of the contract. Now if you have $5 of margin available you can purchase a call or put option on $45 million of AAPL stock.

Also, by keeping the margin requirements low, many Forex traders (who crave extreme leverage) will find the Megas enticing. Indeed, several active Forex investors have recently filed complaints that the 400:1 leverage they were getting on their currency trades was just too "tame" for them. These new Megas should satisfy them.

Settlement Dates

Nano options will settle in T+45s, meaning 45 seconds after they expire. If an investor has shorted a Nano and is assigned then he must deliver the shares within about a minute of having shorted the option. "Shorting Nanos is a great strategy for generating income but, man, you better be prepared to deliver shares fast if assigned." says Mr. Scanlin.

Time Decay

Nanos are expected to exhibit traditional time decay patterns where the value falls quickest as expiration approaches. However, Mr. Scanlin points out "Keep in mind they only exist for 15 seconds... so watching their time premium fall is kind of like watching a lit fuse on a firecracker, except many Nanos don't last as long."

Real Time Quotes

Since Nanos are for ultra short-term investors, the CBOE had to create a new quote distribution system. If there is even half a second of latency in getting the quotes out then a significant portion of the Nano's life has already passed.

To solve this problem, the CBOE built a giant quote board in a new stadium-size option pit in Chicago to display Nano prices real time. The CBOE expects most Nano traders will want to stand in front of it with wireless button-activated, twitch-friendly Buy and Sell devices in order to trade effectively. If traders are sitting at their desk in some other city, by the time they see the quote on their monitor many of the Nanos will have already expired.

Qualified Tax Treatment

When asked if Nanos will be treated the same as regular options for purposes of qualified tax treatment in certain kinds of transactions, including wash sales and special year-end situations, Mr. Scanlin replied "Nah. Just put 'em under Gambling Losses on your Schedule A."

Commissions

Given their short durations, Nano options will typically trade for a few pennies each. Brokerage firms are expected to adjust their commission schedules accordingly so that commissions will be less than 100 times the value of instrument being traded. InteractiveBrokers announced they will be charging 0.000001 cent per Nano traded, and in cases where they've sold the order flow they will split the referral fee collected. In many cases the order flow referral fee could be several times the profit of the underlying Nano trade.

New ETFs Coming

Several ETF vendors have announced plans for "all Nano" funds. The minimum holding period for shares in these new ETFs will be 3 minutes, a rule imposed by the ETF creators so as to not create chaos with their investment strategy, caused by huge money flows in and out every minute.

ETF vendors will also be rolling out "3x Ultra Mega" leveraged funds for those people who feel they aren't getting enough leverage with the regular Megas.


If you enjoyed this year's April Fool's posting, you might also like last year's Free Money Printing Press or our Money Making Guide.

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