Saturday, November 05, 2011

E*Trade Expands Its Options

A little late to the game, the big online broker has upgraded its options programs with some helpful new additions.

Options trading entered the mainstream of retail investing over the past decade, helped along by the tools created by online brokers. Education has made the once-arcane topic more accessible, allowing retail investors to feel more confident about using options to hedge their stock investments. It’s worked. The Options Industry Council estimates that average daily trading volume for 2011 (through September) was 18.6 million contracts, up 22% over the 15.2 million contracts traded in the same period last year.

Several online brokers we regularly cover have made options-trading tools their key focus, including the aptly named optionsXpress (http://www.optionsxpress.com) and Options House (http://www.optionshouse.com), along with tradeMonster (http://www.trademonster.com) and TradeKing (http://www.tradeking.com).

Recognizing the growing importance of options trading to its customer base, E*Trade (http://www.etrade.com) has just added four new options-analysis tools to its Website and its downloadable software platform, E*Trade Pro.

One of these tools, the Options Screener, fills a major gap in E*Trade’s options research lineup, and should prove extremely useful.

Though a little late to the options- screening party, E*Trade’s new tools are well designed, and should provide customers with trading ideas and excellent analytics. The firm has also added educational programs based on the tools. Senior Vice President Chris Larkin claims that “This suite of tools can be used by a wide range of customers, from beginning options traders to the very advanced.”

Larkin says options accounted for nearly 20% of daily average retail trades at E*Trade during the second quarter, and the firm’s clients have embraced the product. “Within the last year, we’ve seen every type of market—bear, bull, and highly volatile—so showcasing options-trading has helped drive the market,” says Larkin. The four new tools are accessible from E*Trade’s Options Tools’ menu. The first three help guide you when you know the underlying stock you want to analyze.

The Strategy Optimizer helps you figure out which options strategies make the most sense, taking into account your estimate of a target stock’s price, time horizon and market outlook (bullish, bearish, neutral), and the amount you want to invest. The Options Analyzer considers your existing holdings and graphically leads you through a series of what-if scenarios, plotting out your potential profit or loss. The Probability Calculator makes extensive use of E*Trade’s historical volatility database to calculate whether a contract will close inside (or outside) a particular price range.

The Strategy Optimizer asks you to fill in four parameters—target price, expiration date, volatility and investment amount—and then generates a table of results for you to consider. You can use a series of slider bars to adjust these parameters, or just type your estimates in directly. The top three results, ranked by potential profit, are presented in detail, while the remaining contracts can be expanded if you’d like to see more information. You can take one of the strategies and run it through the Options Analyzer, which shows the profit and loss in a graphical format. To get an idea of how a strategy is predicted to work out at expiration, you can look at it in the Probability Calculator. Then, if you want to trade the strategy, clicking on the “Trade” button generates a trade ticket.

The fourth tool, the Options Screener, looks at the entire market, in real time, and lets you filter for contracts based on the current environment. There are 19 built-in screens that let you view, for example, unusually high call volume and puts with high time premiums. You can build your own screen, or tweak the ones already in place to meet your own specifications.

Larkin says customer feedback is guiding the refinement of these tools. In the near future, based on an investor’s request, you will be able to filter out ETFs from the screener results, for example. “We’ve gotten a lot of good feedback from our beta-testers, and we’re tweaking the tools as quickly as we can,” Larkin says.

Though E*Trade definitely isn’t the first online broker to make screeners and scanners available, it’s done a nice job with the design and implementation. Better late than never.

TRADE FREE FOR LIFE AT TRADESTATION: The well-regarded firm (http://www.tradestation.com) has created a contest that will give the winner a commission-free futures or equities brokerage account. Through Nov. 20, TradeStation invites the public to dream up ways to use its EasyLanguage programming environment to analyze and trade financial markets. You must be a U.S. resident over 21 years of age to enter, but you don’t have to know how to use EasyLanguage to participate.

The contest challenges entrants to come up with an idea that can be implemented on TradeStation’s platform—it could be a strategy, an indicator or an analysis tool. The winning suggestion will be brought to life on the trading platform, and its creator can trade commission-free for life in one account. Enter at http://www.tradestation.com/tradefreeforlife, or on TradeStation’s Facebook page.

PROMOTING FINANCIAL LITERACY: A new Website, FraudAvengers (http://www.fraudavengers.org) was launched in mid-October with the goal of educating the public on how crooks use online-payment options and technologies to commit fraud.

The site was created by the Foundation for Payments Fraud Abatement and Activism, a Texas-based nonprofit corporation with the slogan, “Pros preventing cons.”

The site contains blog articles contributed by industry experts who want to inform individuals and small businesses on how to reduce their personal risk of fraud. Founder Robin Slade says, “We are confident that informed individuals can be a major force in fighting fraud.” Its purpose is to provide dynamic, up-to-date information that empowers consumers to protect their financial well-being.

That’s a laudable goal, and a community worth joining. 

Published in Barron’s, October 31, 2011. 

Posted by twcarey on 11/05 at 02:44 PM
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