A Robust Rivalry for Options Oglers

CHANGE IS AFOOT—NOT JUST IN THE OVAL OFFICE, but for online brokers, too.

As our 14th annual review of online brokers shifts into gear, firms have started rolling out updates at a frantic pace.

NEWCOMER TRADEMONSTER (http://www.trademonster.com; also see Barron’s “New Broker Dives Into Rough Waters,” Nov. 3, 2008), is already spiffing up its site. It has added spreadMaker, an interesting and educational method for creating options strategies, and the Trade Simulator, which lets you tie your actual portfolio to simulated trades, using all the functionality available on the site.

The spreadMaker tool is accessed from any options-quote screen by clicking on any quote and then selecting “Create Spread” from the menu. You can build all kinds of spreads using drop-down boxes, available expiration dates, and strike prices. When building a spread, tradeMonster displays a risk graph, which shows your expected profit or loss, based on the price changes of the underlying stock. As you build a spread or change its parameters, the risk graph is updated immediately, giving you a quick visual image of the trade you’re considering.

I see quite a few spread-building tools during my tours of online brokers, and this one is unique and very easy to use. SpreadMaker lets you add stocks, puts and calls, and change expiration dates and strike prices, quickly. It even allows you to short a stock when creating a spread. Quotes get updated in real time, along with the accompanying risk graph. To enter an order from spreadMaker, you click on the “Create Order” button, and a trade ticket is filled out for you.

Wade Cooperman, tradeMonster’s CEO, sees the spreadMaker as an educational tool and believes that its real usefulness is in helping users understand what they can trade. “I don’t think anybody new to options trading understands what they’re doing until they start drawing risk graphs. Our tool makes it easy to say, ‘Here’s my risk, here’s my opportunity, and is the risk and reward balance OK for me?“‘

The Trade Simulator lets you play around with your current portfolio and see how, for example, trading some options against a stock that you hold can affect your risk and potential return. Each quote window now has a “Simulate” button, and when you click it, a box opens up in which you can create a position simulation. Simulated positions are highlighted in gold when you elect to see them combined with your actual holdings—so you can easily discern which items in your portfolio are really yours.

When making a simulated trade, your current buying power isn’t taken into consideration (or, of course, affected). This type of simulated trading, which blends your portfolio with possible trades, is a terrific training tool for people who are learning how to trade options.

FIDELITY CONTINUES TO BEEF up its research offerings in an effort to help investors make better decisions. A large percentage of the available research can be accessed without a Fidelity account at http://www.fidelity.com. We covered some of the new pieces last month ("Fidelity Rolls Out Some Holiday Goodies,” Dec. 29), but especially appreciate the look at the various research firms available on the site, and the ways they differ from one another.

From the main page, if you select “Research” and then “Stocks” from the sub-menu, you’ll see “Explore Research Firms” as a link under the “Analyze Stocks” heading. This section offers information and education about the research firms available via the site.

The “Explore Research Firms” page shows what each firm does and how; and there are descriptions of the firms in a table that let you know about the different types of analysis available. In this table, you can find out which firms utilize analyst-driven methodology, and which use quantitative model-driven methodology for their stock recommendations. This section also has a “Wizard”—which lets you find research firms that match your particular preferences. In Wizard mode, you choose the methodology you prefer, the types of variables you want an analyst to consider (fundamental, technical, or environmental/social), and whether you are looking for value or growth. For instance, when I choose “Analyst-Driven” fundamental analysis, looking for value stocks, I am told that I should consider Zacks Investment Research. When I select quantitative models and technical analysis, I’m directed to check out MarketEdge and Recognia.

Another helpful new tool is the “Research Firm Scorecard,” which ranks the firms against their peers. Integrity Research has been generating report cards for Fidelity’s internal use for several years, and now they are available to Fidelity customers. The report cards contain three summary metrics, based on percentage returns over one, two and three years of Buys and Sells, as specified by a theoretical research portfolio. When a firm changes its rating from Hold to Sell, that equity is eliminated from the portfolio and the gains or losses are logged. Most of these firms work through several thousand stocks, so there are a lot of calculations involved. You can’t see these scorecards outside the Fidelity brokerage login platform.

Industry consolidation: How about the news that TD Ameritrade (http://www.tdameritrade.com), among the biggest online brokers, has taken over ultracool thinkorswim (http://www.thinkorswim.com)? I’ll admit I didn’t see this one coming, although I’ve been expecting more online-brokerage consolidations for the past six months. TD Ameritrade has a history of bolstering its software development via acquisition, and given the huge interest in options trading (and the profits available to brokers in this market), I’m not surprised that they’d swallow a platform that is options-heavy. It’s a definite win for TD Ameritrade and its customers.

But how about existing thinkorswim customers? TOS’ corporate culture had the firm positioning itself as the place for the oddballs and characters, and now they’re coming under the umbrella of a huge company. TOS has been a platform that can turn on a dime and do an upgrade a few hours after its staff thinks up a cool new idea. Now, coming from a very large company, the updates will have to be part of a development prioritization methodology that’s huge—so can the constant innovation continue? We’ll keep an eye on it.

Posted by on 01/31 at 03:17 PM






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