Wall Street’s Option Edge Is Gone — Here’s Why

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:

  1. Determining whether or not an option price is “cheap” or “rich” by looking at changes in its implied volatility over time.
  2. Making complex options trades that once required “legging” (i.e., executing each contract separately in a spread trade).
  3. Sweeping multiple exchanges to get the best bid or offers. This allows traders to quickly execute trades at the best prices electronically.
  4. 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.


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Ian King

Editor, Strategic Fortunes


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