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March 2, 2012

Complex Orders Surge

By Peter Chapman

The options industry recorded double-digit growth last year, and at least one broker credited the use of sophisticated strategies for its good fortune.

OptionsXpress, bought by Charles Schwab & Co. in September, saw the number of options trades done by its 400,000 customers jump by 10 percent last year. Multi-leg strategies that establish directionally neutral positions increased in popularity, while those that are bullish or bearish saw less use.

"We have seen an increase in the use of more advanced strategies," Nina Milovac, the director of optionsXpress' educational efforts, said at a recent industry conference. "The biggest increase was in the butterfly strategy."

Nina Milovac

The retail broker handled 27 percent more butterfly trades in 2011 versus 2010, Milovac said. The spread trade is constructed with four options-either all calls or all puts. Two options are bought. Two are sold. A directionally neutral position is achieved.

Overall, optionsXpress' highly active customers boosted their use of spread trades by 18 percent over the previous year. Spreads include butterflies, condors, diagonals, verticals, ratios, boxes, calendars and others.

The firm's customers also increased their use of condors. Like the butterfly, the condor strategy is directionally neutral and involves four options-two long calls and two short calls, for instance. OptionsXpress saw a 9 percent rise in condors last year, Milovac said.

The brokerage official, who spent six years as a market maker at the Chicago Board Options Exchange, was speaking at this year's gathering of the Chicago chapter of the Security Traders Association.

See Chart: Options Xpress

Those multi-leg options trades that establish a bullish or bearish position saw flat or negative growth. Use of straddles, which involve trading both a call and a put, declined by 2 percent at optionsXpress, Milovac reported. Overall, combos, which include straddles and strangles, were flat in 2011.

Strategies meant to hedge the risks of stock ownership got a mixed reception at optionsXpress last year. The use of covered calls, whereby stock owners sell calls against their position, declined by 3 percent, Milovac said. By contrast, the use of protective puts, whereby stock owners buy puts at strike prices below current market prices, grew by 17 percent. The use of collars, a combination of covered call and protective put strategies, was flat over 2010.

The options industry experienced its ninth consecutive year of growth in 2011, as the total number of contracts traded jumped 17 percent to 4.2 billion.

 

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