Wall Street’s Option Edge Is Gone — Here’s Why
When people think of Wall Street, they think of the New York Stock Exchange (NYSE).
It’s the iconic building at the heart of American capitalism. But it’s not the only exchange in Manhattan.
Right up the street from the NYSE on Trinity Place sits the former American Stock Exchange. It’s now called NYSE American.
Among other investments, the NYSE American lists options.
These are investment contracts that let holders buy or sell stocks at a specified future date and price.
I visited the exchange a couple decades ago. And it opened my eyes to the way that options market makers consistently make money.
How 1 New Tech Changed Wall Street
The first thing anyone would notice back then were the traders running from post to post with handheld computers.
These devices looked like giant PalmPilots. They let traders calculate prices of options on the fly as the markets moved and they moved around the room.
These weren’t new inventions. They were developed in the early ‘80s by a Hungarian-born immigrant named Thomas Peterffy.
With these handhelds, traders had access to real-time analytics.
They could easily calculate and view their portfolio’s risk to market movements. That gave them a serious edge on the competition.
Any retail trader on the other side of one of these trades had his or her odds stacked against them.
If you wanted to compete against these part-man, part-machine traders, you needed real-time options analytics.
In the early 2000s, that required a $3,000-a-month Bloomberg subscription.
Wall Street had quite an edge back then.
Professional traders were armed with the best data. And retail traders were bringing a knife to a gunfight.
But all of that changed in the past couple of decades.
Retail Traders Can Trade Options Like the Pros
Thankfully, Thomas Peterffy didn’t stop there.
He took those analytics and created Interactive Brokers. It’s one of America’s largest online trading platforms.
This allowed retail traders to trade like the pros.
Other companies like thinkorswim and E-Trade joined in.
They changed option trading by providing retail traders with analytics that were once costly and reserved only for the floor option traders.
Some of these features include:
- Determining whether or not an option price is “cheap” or “rich” by looking at changes in its implied volatility over time.
- Making complex options trades that once required “legging” (i.e., executing each contract separately in a spread trade).
- Sweeping multiple exchanges to get the best bid or offers. This allows traders to quickly execute trades at the best prices electronically.
- Real-time monitoring of an options portfolio’s sensitivity to market moves.
These are only a few of the tools that options traders now have at their fingertips.
And on Thursday, I’m going to help everyday investors understand how to profit from the same types of strategies used by the pros.
You can join them by signing up for my Profit Framing webinar if you haven’t already.
Editor, Strategic Fortunes
From open till noon Eastern time.
BrainChip Holdings Ltd. (OTC: BRCHF) develops software and hardware solutions for artificial intelligence and machine learning applications. It is up 33% after the company announced that it has started taking orders for its new mini PCIe board product that can be plugged into an existing system to unlock capabilities for a wide array of AI applications.
Activision Blizzard Inc. (Nasdaq: ATVI) develops and publishes video games and other interactive entertainment content. It is up 27% on the news that Microsoft has agreed to buy Activision Blizzard in a $68.7 billion deal, creating the world’s third-largest gaming company.
Digital World Acquisition Corp. (Nasdaq: DWAC), the SPAC that is taking former President Donald Trump’s social media company public, is up 15%. The stock has gained the attention of meme traders and is up on no fundamental news today.
Luckin Coffee Inc. (OTC: LKNCY) is the equivalent of Starbucks in China. The stock is up 11% this morning as part of a general uptrend in the Chinese markets driven by strength in Chinese property and infrastructure stocks.
Houghton Mifflin Harcourt Co. (Nasdaq: HMHC) is an educational publisher that provides curriculum, supplemental and professional learning services worldwide. It is up 11% on rumors that it is exploring corporate options, including a sale.
Ubisoft Entertainment SA (OTC: UBSFY) produces, publishes and distributes video games for consoles, PC and smartphones. It is a video game company that is up 9% today, trading in sympathy with Activision Blizzard.
Blink Charging Co. (Nasdaq: BLNK) owns, operates and provides electric vehicle charging equipment and networked EV charging services. It is up 9% on the announcement of its deal to deploy electric-vehicle chargers at General Motors dealerships in the U.S. and Canada.
Virgin Orbit Holdings Inc. (Nasdaq: VORB) is a recently public space launch and space services company. It is up 7% on a rebound today after falling last week in the days following its first space launch as a public company.
Kohl’s Corp. (NYSE: KSS), the clothing and apparel retailer, is up 7% this morning. The stock rose after activist investor Macellum Advisors urged the company to explore a sale to improve the operations of the business.
Danaos Corp. (NYSE: DAC) offers seaborne transportation services, such as chartering its containerships to liner companies. It is up 7% on the announcement of $1 billion in contracted revenues and sale proceeds through new charter arrangements.
My career on Wall Street started while I was in college. I spent a summer interning for Merrill Lynch in the middle of the ‘90s bull market. I was fascinated with trading, and as a result, after college, I joined Salomon Brothers in the famed mortgage bond trading department. Later, I spent time at Citigroup working with credit derivatives. Eventually, I needed to walk away from the excess of Wall Street. That’s when I joined Banyan Hill in 2017. Now I help readers get ahead of the market and build their retirements.