With options fast becoming part of mainstream investing and driving profits for online brokers, TD Ameritrade’s proposed purchase is saner than it first appears

By David Bogoslaw

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You would think that the widespread market carnage from beginning to end the past year or further would have reality enough to scare most deal out in small portions investors not present from risky investments like options, but that’s not the token being sent by TD Ameritrade’s (AMTD) proposed cash-and-stock deal, valued at $606 million, to attain online options broker Thinkorswim Group (SWIM), announced on Jan. 8. Ameritrade is the No. 2 online broker in terms of mart capitalization, behind Charles Schwab (SCHW).

Options trading is the fastest-growing segment of the online brokerage assiduity, and while options certainly aren’t appropriate for the unschooled or less sophisticated investors, they can help investors protect their portfolios in declining markets. And investor education tools in the same state as those offered by Thinkorswim have helped arm more investors by the confidence they need to wade, if not dive, into these murky waters.

The fact is, options are currently the greatest in number profitable segment of the online brokerage creation, and options-dedicated firms like OptionsXpress (OXPS), the largest independent options brokerage, and Thinkorswim have been doing well even end the markets’ declines, according to Robert Ellis, senior vice-president of the funds management group at Celent, a Boston-based financial research and consulting firm. Active online traders "took advantage of the mart declines using options in a distance that buy-and-hold investors couldn’t," he says.

Options Trading Goes Mainstream

The merger of options education Web place Investools and online agent Thinkorswim nearly two years ago was greeted with a lot of skepticism in the market, but the combined company’s success has been proof of the synergies that exist betwixt education and trading action, says Richard Fetyko, an analyst at Merriman Curhan Ford (MERR). Those synergies hold enabled Thinkorswim to grow its trading volume at a faster pace than each OptionsXpress or TD Ameritrade, he adds.

"I think that combination has gotten the attention of some of the larger online brokers and also acknowledgement that options trading is no longer purely a platonic commercial tactics in favor of high-end retail investors, that it’s becoming further mainstream," he says.

And that realization has companies like Ameritrade and Schwab scrambling to fortify their platforms’ ability to trade options, in response to the loss of market share to stronger options platforms like Thinkorswim in recent years, he says.

One conception that options volume has grown 25% by the year in succession average in the place of the past 10 years is increasing awareness that options can avoid investors better manage their risk and add gains to their portfolios, says David Fisher, chief executive at OptionsXpress. One of the more conservative strategies that beginning options investors use is the purchase of puts, which give holders the right but not the bond of duty to barter a stock at a specified price above where it has fallen. A second one is selling covered call contracts against existing stock positions in your portfolio to generate income even if stock prices aren’t moving up, with high levels of volatility pushing up prices without interruption calls, says Fisher. "It’s easy to show people in this market in what condition [these transactions] make sense," he says.

Original text: http://www.businessweek.com/investor/content/jan2009/pi2009018_070323.htm?campaign_id=rss_null