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 http://www.cboe.com/weeklys.

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 (http://www.thinkorswim.com), 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 (http://www.ameritrade.com) and OptionsXpress (http://www.optionsxpress.com) were quick to offer them to their Web-based online brokerages; thinkorswim and TradeStation (http://www.tradestation.com) 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 http://www.cboe.com/LearnCenter/webcast/archive.aspx.

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 Tradesports.com (http://www.tradesports.com), 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 StreetSmart.com, 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.com.”

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.

Streetsmart.com is a hybrid, with the streaming tools from StreetSmart Pro as well as the depth available at Schwab.com. Schwab customers who qualify for the Signature level of service—trading 12 times or more per quarter—can request access to StreetSmart.com. To use the tools, you log in through the usual Schwab.com site, and click on “Load StreetSmart.com.” You can customize your login to go directly to the active trader tools as well.

StreetSmart.com 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 StreetSmart.com; the program flips you back to the Schwab.com 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 Schwab.com 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.

StreetSmart.com 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 Schwab.com. 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