DEFINITION of Mini-Sized Dow Options
A mini-sized (or 'mini' or 'E-mini') Dow option is a type of index options contract for which the underlying assets are E-mini Dow Jones Industrial Average (DJIA) futures contracts. However, the mini version has a 5 times multiplier, which means that each options contract on the index controls just one-fifth of the value of the index. This gives the option holder more leeway in his or her investment compared to cash index options at a greater cost. The option is traded electronically through the Chicago Mercantile Exchange's (CME) Globex system.
Mini-sized contracts in futures and options also exist for a wide range of indexes such as the Nasdaq 100, S&P 500, S&P MidCap 400, and Russell 2000, as well as commodities such as gold and currencies such as the euro.
BREAKING DOWN Mini-Sized Dow Options
Mini futures and options contracts allow investors to trade fractional sized increments of broad market indexes or commodities. For instance, an investor or trader may not want to own whole units of the Dow Jones Industrial Index, which is trading for around $25,000 per index unit. At 1/5 the size of the index, one mini Dow option represents just $5,000 of the index, which is more tractable. Mini sizes also help in creating more accurate hedges, for example if an investor needs to protect against a downside move in the DJIA index but owns 3.4 index unit's worth. If they purchase 3 full sized protective puts, they will be under-hedged since 0.4 index units will remain. Likewise, if they purchase 4 full sized puts, they will be over-hedged by 0.6 units. With a mini-sized Dow option, they can implement a perfect hedge on the 3.4 units using 17 contracts (17 * 1/5 = 3.4).
E-mini options on the Dow Jones Industrial Average index are American style options, meaning that they can be exercised at any point before expiration. Option exercise results in "physical" delivery of a corresponding position in the underlying cash-settled E-mini futures contract. In contrast, the full sized Dow options are exercisable for full sized Dow futures.
Mini's, also known as E-mini's since they are traded electronically on the Chicago Mercantile Exchange's Globex system, are available for several indexes and other products. As of 2018, the E-mini Dow Jones contracts are the third most popular mini contracts (both futures and options) on Globex, behind the Nasdaq 100 E-minis in second place and the S&P 500 E-minis as the most popular by volume.