Monday, November 21, 2005

Options for the Impatient

LOOKING FOR INSTANT GRATIFICATION? The Chicago Board Options Exchange has come to your rescue with new short-dated options, which are issued on a weekly basis.

Weeklys (as they are called in the plural) are intended, according to the CBOE, to provide investors with a means to trade options specifically around certain news or events, such as economic-data announcements. For now, there are only two weekly options available, based on the Standard & Poor’s 100 Index (SPY) and the S&P 500 Index (SPX). Additional information about Weeklys is available at

Why trade them? Jon Lewis, writing for Schaeffer’s Research, says, “Weeklys will allow short-term traders to fine-tune their option selections by being able to more closely match the lifetime of the option with the time needed for the stock to move.”

Tom Sosnoff, chief executive of thinkorswim (, takes credit for bringing the idea to the CBOE and encouraging them to develop it further. “When I presented the idea, I made the pitch to call it the Quickie,” he says. “I wanted to give some marketing oomph to the exchange, but they thought it was risqué, so they went with the name Weekly.”

So far, only a few online brokers are making weeklys available . Ameritrade ( and OptionsXpress ( were quick to offer them to their Web-based online brokerages; thinkorswim and TradeStation ( offer them through their direct-access (software-based) systems.

Ameritrade made short-dated options available in advance of developing a client interface that brings them up easily, so customers will have to know the symbol to get quotes. Ameritrade’s Help system lets customers find the symbols, but it’s a little clumsy right now.

“We’re definitely getting some trades on these—we executed the first one the first morning they were available,” says Jay Pestrichelli, managing director of Ameritrade’s Active Trader segment. Options traders will see the value in short-dated options by comparing the price of a Weekly to the monthly option at the same strike price, he adds. “Your delta [the change in the option’s price relative to the change in the price of the underlying security] is better because there’s a bigger swing in the options chain when there’s a shorter expiration,” he notes. “Once they expand weeklys to equities, you’ll see some weekly covered calls and other strategies.”

Ameritrade sponsored a 45-minute Webcast on the CBOE site that can be accessed at no charge; you’ll find it toward the bottom of

OptionsXpress made the Weeklys easier to find right out of the box. During weeks when there is a Weekly option being traded for SPX or OEX, those chains will be displayed when you get an options quote.

Thinkorswim displays weekly options next to the nearest monthly strike. “I put a gun to our developer’s heads to make sure we supported them. They’re very easy to find in our software,” Sosnoff says.

Total trading volume in SPX Weeklies averaged about 1,150 contracts a day in their first two weeks, while the volume of OEX counterparts was roughly double that, at 2,400 contracts per day, said CBOE spokesman Gary Compton.

Trading Weeklys incurs the regular commission charges at the various brokerages where they’re now available. We expect to see more players in the game as interest in trading Weeklys picks up. Sosnoff anticipates more retail-friendly products in the very near future, which should lead to additional open interest. “I’d like to see Dailys,” he says. “A trader could walk in in the morning, launch five strikes, and have some fun during the day.”

If that’s your thing, you also can head to (, where you can place bets on everything from intraday levels on the Dow Industrials to whether avian flu will be found in the U.S. by year’s end.

SCHWAB IS ROLLING OUT, which takes the tools formerly available only through its CyberTrader direct-access subsidiary and makes them accessible via a Web browser. According to Vincent Phillips, chief executive of CyberTrader, “Our clients love the streaming tools and trader orientation of Schwab Trader CT, but they also wanted the account management and additional trading capabilities from”

Schwab’s mainstream site is fairly comprehensive, but it doesn’t have the streaming news, quotes and charts that active traders demand. At the other end of the spectrum, StreetSmart Pro from CyberTrader involves software that you download. The gap in the middle of Schwab’s range was a Web-based offering for frequent traders. is a hybrid, with the streaming tools from StreetSmart Pro as well as the depth available at Schwab customers who qualify for the Signature level of service—trading 12 times or more per quarter—can request access to To use the tools, you log in through the usual site, and click on “Load” You can customize your login to go directly to the active trader tools as well. loads a Java application, which (assuming you’re connected to the Web, preferably via a broadband connection) displays a watch list that contains up to 20 symbols. From that window, you can switch to charts, news, or a trading screen.

The Website offers the same technology as StreetSmart Pro—customizable streaming charts, streaming quotes, and news. The charts can be simple, or customized with overlays and technical studies. “We’re finding that many clients want all the power from the downloadable software applications, but they prefer the Web interface,” says Jeff Lyons, President of Schwab’s Active Trader division. “This is a perfect application for them.”

You can trade stocks and options (though not Weeklys as yet) on; the program flips you back to the site for certain functions, such as advanced options trades. The flip back to the Schwab site still has a few bugs to work out. For example, while accessing a detailed quote for Microsoft, I clicked on “Other Products” and it opened a window with a mutual-fund trading ticket displayed—with Microsoft’s stock symbol filled in. Going ahead with a trade as prompted would have resulted in an error. does indeed fill a gap in Schwab’s overall product line, and will most likely in time result in retiring the SchwabTrader CT offering, which forced users to have separate accounts for mutual funds and bonds. This new product is quite a bit easier to use, though being dropped back into the regular Schwab site may be jarring. If you have multiple Schwab accounts, you have to make sure that you’re in the correct account when switching back and forth from StreetSmart to I expect to see these small inefficiencies smoothed out soon.

One point Lyons and Phillips drive home is Schwab’s plan to stay out of the online-brokerage industry’s merger mania. Says Phillips: “Clients don’t like to be disrupted, they don’t want new phone numbers to call, new platforms to learn. “

Posted by twcarey on 11/21 at 05:57 PM
Published in Barron'sPermalink

Monday, November 07, 2005

Get With the Program

INTERACTIVE BROKERS (,which we rated the best software-based broker this year ("Speed or Comfort,” March 7), didn’t earn that designation by resting on its laurels.

One interesting innovation the firm has pursued is a competition among current college students studying computer science and engineering, in order to promote technological innovation for trading platforms.

Interactive Brokers Group is sponsoring the IB College Trading Olympiad to highlight the growing need for computer science and engineering students in the financial industry. Students will compete by creating and implementing real-time program trading applications. Some 113 students will earn prizes ranging from $1,000 to $50,000, with a matching grant made to the sponsoring college for the top three prizewinners.

Students who apply for the Olympiad by Dec. 31, will put their systems to use by trading with $100,000 in phantom money, using the Interactive Brokers Trader Workstation (TWS) Application Program Interface (API). Various programming languages are allowed, including Java, C++, C, and Visual Basic.

“This competition is intended to promote technology, computer science and engineering,” says IB Managing Director Steve Sanders. “The students will be writing trading applications that could be used by any of the large firms on the Street.”

Trading for the 250 students accepted into the competition will start on Monday, Jan. 23, at 12:01 a.m. EST and run for 10 weeks until Friday, March 31, at 11:59 p.m. EST. The trades the students generate will not be executed, but using IB’s simulation engine, they will be filled against actual prices and sizes when the trade is entered.

“We figure a good way to encourage students to get involved in financial technology is to throw some money on the table and say, ‘Hey, there’s a shortage of good technology people in the trading industry,’ “ Sanders says. “If this competition turns out to be a success, I could see making this a yearly event.” He hopes universities will become involved, too, so they can qualify for the matching prizes. “We hope our grants to the universities won’t be just chump change for them, and will really stimulate competition.”

Sanders notes that the application deadline allows students to try writing trading programs that connect to TWS prior to signing up. “We’re giving everyone time to write their programs and test them out,” he says.

For non-propeller-heads, IB has spiffed up the creature comforts of its site, a welcome move since its trading application, the IB Trader Workstation, involves a rather steep learning curve.

A new portfolio-allocation scheme was introduced in early September, which lets customers examine their investments across product types (stocks, futures, forex, options, etc.) and around the world. “Advisers asked for this, and it lets them rework a client portfolio quickly,” says Sanders.

The firm has also beefed up its customer education considerably, and is offering dozens of “webinars.” Sanders says that many of these attract 1,000 or more customers. Most of the webinars begin at 4:30 p.m. Eastern time, and feature such topics as order types, volatility for options investors, and interactive analytics. Of interest to those considering entering the Olympiad, a webinar on Nov. 16 will cover the TWS Application Program Interface.

IB also rolled out several risk-analysis tools in its suite of interactive programs. Of particular note is the Value at Risk tool, which displays a trader’s risk across multiple asset classes using a series of tabbed pages. Each page shows a specific slice of the portfolio’s risk, sorted by position, various risk metrics and VAR. It also allows users to create hypothetical “what-if” scenarios by adding, removing and modifying contract positions.

The Value at Risk summary shows the greatest loss a portfolio could sustain over one day within a specified probability. This value is calculated three ways, and shows the user’s worst possible loss out to 4.5 standard deviations.

One pet peeve I’ve had about online broker services is the account statement. IB is testing out flex statements, which allow users to specify what they want to see and in what order they wish to see it. Since IB is self-clearing (account statements are generated by the clearing firm, not the brokerage), it can offer this amenity.

Last, but certainly not least, IB has cut its already low prices even further. Effective Nov. 1, commissions were reduced by 50% for U.S. equity trades and by 25% for U.S. option transactions. Equity commissions are now 0.5 cent per share, options are 75 cents per contract, and futures are 25 cents to $1.20 per contract, plus exchange fees. Spreads on currency trades on the euro versus the dollar will be 1 to 2 pips. (A pip is analogous to a basis point—1/100th of a percentage point.)

All trades carry a minimum charge of $1, which is considerably lower than most brokers’ minimums.

In late October, IB launched an ad campaign aimed at Refco customers, while simultaneously making a sizable bid for Refco’s remaining assets and customers. “Interactive Brokers is ready to offer Refco’s customers who trade futures and foreign exchange around the world the same market access they enjoyed with our competitor,” said Thomas Peterffy, chairman of Interactive Brokers Group (IBG), the parent company of IB and market-making firm Timber Hill. “We have a long-established presence in all the markets where Refco provided access.”

ONLINE BROKER NEWS: FOLIOfn (, which allows customers to trade baskets of stocks on a dollar basis, rather than a share basis, has added nine Mini-Folios to its list of Ready to Go Folios. A folio can hold 1 to 50 securities, but Ready to Go Folios generally have 20 to 30. Some folios focus on a particular sector or industry, while others are more broadly based. Users, who pay a monthly fee ranging from $19.95 per month to $39.95 per month, can customize any folio to meet specific preferences.

FOLIOfn’s pricing plans allow you to conduct as many as 600 trades during two daily transaction windows. You can treat each folio as a separate unit, distributing a specific dollar amount evenly across all the stocks in a folio, or sell a folio’s entire contents at once. You can also rebalance a folio with a few clicks of your mouse.

If you want to trade an individual stock outside the transaction windows, it will cost you just $3.95 per transaction—a low fee that the firm introduced in March. You have to be either a Silver ($29.95 per month) or Gold ($39.95 per month) member to take advantage of this pricing.

The Mini-Folios contain three to five exchange-traded funds, rather than the 20 to 30 in most of the other folios. Each represents a point in the risk spectrum. An online wizard helps customers choose the appropriate Mini-Folio. The folios can be bought (and periodically updated) with just a few mouse clicks.

Posted by twcarey on 11/07 at 05:59 PM
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