Saturday, November 21, 2009

TradeMonster's Friendly Options Play

TRADEMONSTER, AN ONLINE BROKERAGE THAT caters to options traders, has introduced a new analytical feature called tradeLAB. Barron’s got an early peek at the new tool, which will be available on tradeMonster’s Website Nov. 16.

Skip Shean, a vice president at the firm, explains that the device takes three complex pieces of information about an options strategy—the underlying stock price, implied volatility and time to expiration—and distills them for less sophisticated options traders. This fledgling investor most likely has an opinion about the underlying security—bullish, bearish, or neutral. TradeLAB will then show the prospective trader whether an options transaction selected—either from the site’s strategy menu or its spreadMaker tool that helps create strategies—would be profitable if the stock pick turns out to be correct.

“The intent is to arm our customers with better, more actionable information to analyze a position and decide whether or not to place the trade,” Shean says,

Like most of the tools on tradeMonster’s site (http://www.trademonster.com), you can get to it from anywhere in the application, including the positions screen, the quotes window, or even an order ticket, before you push the Send button. There are also links from spreadMaker and adjustTrade ("Hardly a Lazy Summer for Brokers,” Aug. 10). Once you’ve popped a tradeLAB window open, the Analyze button loads the strategy you’re considering into tradeLAB.

TradeLAB has two components, a snapshot analysis of how the trade could look at expiration, and a spectral analysis, which shows a range of possibilities from the date of the trade through to expiration.

There are tools similar to the snapshot analysis on most options-trading Websites, although tradeMonster’s version makes key events (such as ex-dividend dates and earnings dates) easier to view. You can change the purchase price or the implied volatility of the strategy to see how that affects your profit possibilities.

The spectral-analysis feature is obviously where tradeMonster has focused its proprietary work. In spectral analysis, tradeLAB lays out the characteristics of a strategy in a way that makes the possibilities much easier to understand. The initial display is a standard candlestick chart, showing pricing in the recent past. The chart then extends into the future to show a color map of the characteristics of your strategy and how it will perform in any scenario.

The spectral chart is color-coded, so that deep green is a 50%-plus gain and deep red a 50%-plus loss, with lighter shades of green and red in between. When you point your mouse cursor to a particular point, tradeLAB shows what the exact gain or loss is. The chart style can be changed. You can display the earnings dates or blow up the entire chart to see a more detailed view. You can also alter the volatility forecast, using a drop-down menu box that lets you pick from the 30-day average, 52-week high or low implied volatility, or any possible volatility you enter yourself to see how the strategy responds.

Shean says that tradeLAB hammers home the effect of volatility on a trader’s potential profits. “Being able to change the volatility forecast and immediately see how it affects the profitability potential of a position helps people take it to the next level of understanding,” Shean observes. “We think it’s a really revolutionary tool.”

The spectral chart is made up of multiple calculations for every trading day in the forecast, so there’s a lot of number-crunching going on. All the analysis performed by tradeLAB is done on your local machine, not tradeMonster’s server, which should keep the site from bogging down when trading volume is high. Once you’ve tweaked the options strategy to your specifications, hit the Create Order button in the lower right corner to generate an order ticket. (Fees are $7.50 per stock trade; options fees begin at 50 cents per contract with a $12.50 minimum.)

This very interactive and graphical tool allows a trader to stress-test a position, and assesses the potential profitability of a trade under a variety of conditions. TradeMonster officials doubt that they will make tradeLAB available for hypothetical, or paper-trading, use; you will have to fund an account to use it.

Another feature just added to the tradeMonster site is the ability to detach windows, which allows the user to separate out, say, a favorite chart or watch list, from the overall platform and run it independently. That capability can come in handy for those using multiple monitors. Shean notes that the platform behaves like a downloadable software system, but in fact is accessible through your Web browser. “Every time a customer logs in, they have the latest version and they don’t have to download any patches or reconfigure their system. It runs on any browser or any operating system, as long as it has the [Adobe] Flash plug-in,” he says.

When tradeMonster was launched a year ago, I expressed some reservations about its survival, given the stock market’s gyrations. Shean says the privately held company, a unit of optionMonster, turned a profit in early October, a milestone it didn’t expect to reach given the headwinds in late 2008 and early 2009. It looks like tradeMonster will be around for a while yet.

CAN’T WAIT FOR NEW YEAR’S
: Retail investors surveyed during the last week of October by online broker TradeKing (http://www.tradeking.com) believed that an economic recovery won’t happen until next year. TradeKing conducts a quarterly survey of sentiment; this time around, 47% of the respondents described their market outlook as “neutral” or “not sure.” The firm says those are the highest readings for those sentiments since the survey began in July 2007.

U.S. unemployment claims continue to be the top trade trigger for both equities and options traders, with 41% of those surveyed saying that this is their primary concern. U.S. housing, consumer spending and interest rates tied for second, at 30%. These concerns knocked quarterly earnings from the No. 2 spot in the prior quarter, falling sharply from 36% to 27% in the most recent survey.

The two most popular sectors for long investments are energy, registering with 58% of respondents, and technology, with 47%. And what are the most prevalent short-selling sectors? Transportation and travel topped the list, followed by finance and retail.

“One thing is certain: Uncertainty dominates right now,” says Don Montanaro, chairman and CEO of TradeKing. “We see at TradeKing how investors’ bullishness comes in the form of very specific moment-in-time opportunities, but the overall sense is that the market could go either way on any given day until we see some solid trending data signaling long-term recovery.”

Published in Barron’s, November 16, 2009. 

Posted by twcarey on 11/21 at 10:22 AM
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