This paper studies the rise and fall of “Mini” options that are especially catered to retail investors for popular but high-priced securities. Using transaction-level data, we find that transaction costs of Mini options are much higher than those of standard options and the difference cannot be fully explained by cost-related determinants. Furthermore, we find evidence of price discrimination against retail investors from analyses of price elasticities of option traders, an event-study of changes in bid-ask spreads around earnings announcements, and comparisons of trade prices paid by Mini and standard option traders for the same security at approximately the same time.

Mini options are specially catered to retail investors with limited capital for trading options on extremely high-priced securities. The coexistence of both Mini and standard options for the same underlying security provides us a novel setting to investigate whether and how small retail investors use derivatives contracts differently compared to their counterparts. First, we find that the Mini option investors are more subject to constraints of limited attention. Specifically, Mini option investors trade more intensively near market opens, and their trading activities are more heavily influenced by attention-grabbing events and attention-distracting events. Second, we document that Mini option investors’ trading is more likely to be driven by market sentiment than standard option investors. Third, the trading performance of Mini option investors is also worse than that of standard option investors, with less positive intraday returns and more negative overnight returns.