Stock and Index Options Trading Revolution

Online option trading is finally coming into its own. NetPicks Stock & Option Investing Advisory has been published since 1996. When we started, our option picks were immediately popular. However, option brokers didn't exactly provide many execution choices. To place these option trades, we were just starting to see the new online brokers offer basic buys and sells of calls and puts. Stock options commissions were high - much higher than stock trading. Same goes for index options.

There was also the phone broker alternative. This was OK, and included the ability to do some more creative contingent orders based on the underlying stock. But talk about giving up control of your orders and having to deal with the whims of the human on the other end of the phone, especially if they misunderstood what you wanted. In trading, it's always your error - at least in the opinion of most brokers. Which is why placing a trackable electronic order has so much appeal.

Well, this is all changing dramatically. We anticipate that the same revolution in stock trading - commissions, speed of executions, creative orders - is about to hit options trading. We're already starting to see it. Let's take a look at some recent developments:

New Electronic Options Order Exchange

1. International Securities Exchange

This is big news. The ISE will be the first fully-electronic U.S. options exchange. Stock traders know all about Island. Ever place an Island order? Wow, talk about fast - near instant execution when you hit the bid and the ability to see the market moving in real time. The ISE looks to bring that same type of electronic order matching to options trading. They are currently working on developing the consortium of brokers who will provide the order flow. And sure, it will take a bit of time to get the number of options and volume to the degree we'd all want to see it. But, this is exciting news for option traders and they expect to start their rollout in June of 2000.

Advanced Online Option Order Entry

2. Contingent Orders Online

Stock option investors know that placing anything but the most conventional of orders online has been more than a challenge - more like impossible. However, that is changing.

One online broker, Preferred Capital Markets, is already offering the ability to enter contingent option orders. When you want to buy or sell a call or put, you can do so when the stock hits a certain price level. Of course, there is always the challenge of determining what the price of your fill might be, but think about how great this feature will become in combination with the ISE above and improved liquidity. No more having to catch every move of the stock and then rushing to get your options order entered.

This system also allows you to choose a platform that integrates nicely with online streaming quote services such as eSignal.

We'd also expect brokers like TrackData (MyTrack) to integrate these features over time as you'll find the brokers who push the most advanced stock trading features will look to incorporate the same for options traders.

Finally, Prices Coming Down

3. Competitive Commissions

eDreyfus was really the first to get the ball moving in providing lower priced options. $15 per trade (for a limited number of contracts). That sure beat many phone brokers who would try to charge upwards of $100 and many online brokers near $50. Those prices are coming down. $29 per trade already is seeming high and we're seeing $19.95 and lower. This is only going to get better as options become more popular, as the ISE mentioned above brings electronic order matching, and as more online investors become involved. Watch for a price war, and expect the "old" exchanges to have to lower their fees which will get passed along to options investors - like ourselves.

Fast Fills - Go Electronic

4. Electronic Order Flow

"Market and Marketable Limit Orders for 20 Contracts or Less. Orders priced at market and at the current bid if selling or the current ask if buying are routed automatically to a specific options exchange for execution via exchange systems known as RAES (CBOE), AMOS (American Stock Exchange), POETS ( Pacific Exchange), and AUTOM (Philadelphia Stock Exchange). These orders are executed automatically at the exchanges by their computerized systems." This is taken from Preferred Trade's website and explains how we are even now seeing instant executions by online broker of option trades. Keep under the limit in number of contracts and your order avoids the options floor and manual fills. It's done automatically for quicker option trading fills.

Same goes for index options such as the OEX and even the options for the new sector stocks that we are trading including the QQQ, HHH and BBH.

In summary, you can see that this is an exciting time for stock and index option traders. The days of slow executions, high commissions, and manual order handling are ending for option investors. We like to think we were a bit on the cutting edge being one of the first option (and stock) trading services published continually on the internet - back in the early days - 1996. Finally we are seeing the online broker world catch up to the demands of the new options investor. We'll keep you up-to-date as more developments are announced.

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