Hello, 1: Why options are always for 100 shares, what's the reasoning especially for expensive stocks? 2: How a small investor can hedge stock like AMZN where you can only buy less than 100 shares? 3: Is it good idea to buy a call option - instead of the share itself - along with a put option? what do you think?
1. Most likely there was no reasoning. Options were initially intended for well-capitalized professional investors. 2 With another option? 3. It depends
1: options are standardized. If it wasn't always 100 shares that would get complicated very quickly. It does happen though. For example, when stock splits occur. I don't know the history, but I suspect it's because the standard "lot" size on a stock was 100 shares. 2: Use an options as a form of leverage by creating a synthetic long stock position by buying the call and selling the put. It has the same profit/loss profile as long stock (although you'll likely have some slippage and extra commissions vs just buying the stock). Now that you have your synthetic long, you can then hedge as per normal by buying a put at whatever strike and expiration you wanted for your hedge. 3: Using call options by themselves (without simultaneously selling a put) would be another way to utilize options as a sort of leverage on owning the stock, although the profit/loss profile is not the same as the synthetic long stock and you have time working against you. In the synthetic long stock (buy a call and sell the put), the theta decay on the short put offsets the theta decay on the long call. If you just buy the call, then you only lose on theta decay. Up to you to decide the right approach, but options can allow an investor who does not have enough cash to buy 100 shares of AMZN to still go long the stock and buy a put for protection, but bear in mind, it's still 100 shares being represented by the options, so those price movements will be wild. That kind of leverage is probably not appropriate for most.
In the olden days, stocks traded in round lots more cheaply than odd lots. They also traded at fractions of price rather than decimals. Option prices are small, so 100 of a $1 contract is only $100. It's a question of liquidity. Stocks are only recently liquid enough to not see much difference in cost between large and small amounts traded. When option volumes become large enough, minimum ticks and round lots will be more or less done away with like they are today for stocks.
This would still expose the OP to the issue of over-hedging though. I think the OP's concern is how to hedge via Options for expensive stocks like AMZN when you can only buy <100 shares of the stock and yet the Options is always for 100 shares minimum. If the OP still ends up buying the put, the put would still be for 100 shares. OP would still be over-hedging. I think over-hedging is just not able to be avoided when you hedge with Options when you buy/sell less than 100 shares. The only other way to hedge is trying to buy another stock that moves completely opposite of the stock you buy OR hedge with market index stocks like SPY or even VIX products but neither of them move EXACTLY opposite to the stock you buy especially if the stock you buy is not a stock that makes up the market index like the DOW or S&P 500. This is what is called a strangle or a straddle depending on whether you use the same strike price for both the call and the put or not. This would not work well unless the stock is moving with EXTREME volatility like during earnings time or sudden news (which you would not know in advance enough to take advantage of) and you would suffer a great loss on both the call and the put if the price just moves a little bit like usual either way, because with each day that gets closer to the expiration date, the price of the call AND the put automatically drops in price UNLESS there is a BIG HUGE movement either way to push the call or the put price up. This is called "killed by time decay". If you are thinking of buying odd lots of AMZN, best way to hedge is with SPY or with VIX products since AMZN does make up the S&P Index but keep in mind that it would not be a perfect hedge.
With regards to item 2, buying the OTM put as a hedge was intended to be combined with the synthetic long stock position (where synthetic long = buy atm call, sell atm put for example). The total position would be +1 call, -1 put, +1 put (where 1 put is equal in strike and expiration to the call and the other put is used as the OTM put hedge). I don't see this as a case of over hedging if the OP wants to simulate owning 100 shares with a protective put, but I do think it's a case of over leveraging. To provide a realistic example (I'm NOT recommending this and prices are roughly as I type this): Synthetic long: Buy to open 1 call option with 1540 strike expiration October 19th at a cost of $162/contract (total $162 * 100 = $16,200). Sell to open 1 put option with 1535 strike expiration Octrober 19th at a cost of $139/contract (total $139 * 100 = $13,900). Protective put: Buy to open 1 put option with 1400 strike expiration October 19th at a cost of $81/contract ($81 * 100 = $8100). Position would be: +1 Oct 19th C1540 -1 Oct 19th P1540 +1 Oct 19th P1400 Total margin impact of $14k, so while I don't consider this a case of over hedging, I would classify it as a case of over leveraging.
There were mini options for a while. Options on 10 shares. Never developed much traction because the firms charged same commissions. Not sure if they were delisted - check you chain. AMZN was one of the names for the trial.
They are gone ! Mini Options Product Specifications Description Mini options share many of the same product specifications as the Equity or ETF option contract except that they deliver only 10 shares of the underlying rather than the 100 shares of the standard contract, and the premium and strike multiplier is also 10. They can be identified by the numeral "7" after the underlying symbol. (If there is a corporate action, the symbol may have an "8" or "9" after it.) Unit of Trade 10 shares per option contract. Premium Quotations Stated in points. One point equals $10. Strike Price Intervals In general, mini-option strikes mimic existing option strikes in that regular series. Exercise Style American-style. Mini options on equity and ETF products may be exercised on any business day prior to the expiration date. Exercise Settlement Time Exercise notices tendered on any business day will result in delivery of the underlying shares on the second (T+2) business day following exercise. Expiration Months Mini options are listed on the same cycle as the product's standard options. Weekly and quarterly expirations may also be listed. Expiration Dates Mini monthly options expire on the third Friday of the expiration month. Many products also list mini weekly options that expire on Fridays. If an exchange holiday occurs on that Friday, mini weekly options will expire on the preceding Thursday. Position Limits For purposes of compliance with the Position Limits Rules, ten mini options contracts equal one standard contract overlying 100 shares. Investors may check Position Limit reports from OCC's website for more information. Minimum Customer Margin Purchases of puts or calls with nine months or less until expiration must be paid for in full. Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. Margin requirements for some broad-based ETFs may vary. (*For calculating maintenance margin, use the option's current market value instead of the option proceeds.) Trading Hours 9:30 a.m. to 4:00 p.m. ET. 9:30 a.m. to 4:15 p.m. for broad-based ETFs.