If Not Now, When?

Summary Points

• Advances in technology, innovative trading tools and better access to information have helped to level the playing field for the average options trader.
• With faster execution, there has been an ongoing shift away from trading floors altogether and toward pure electronic trading.
• Other factors benefiting "the little guy" include multiple listings on different exchanges, pricing in one-cent increments and new products targeted toward individual investors.

Options once intimidated most investors, who viewed them as complex, highly advanced financial instruments best left to skilled traders with extensive knowledge and experience. In recent years, however, with the growth of online tools, extensive information becoming widely available and research accessible to everyone, the field has opened up to ordinary investors without specialized training. Many have found options to be a valuable part of their investing strategy. TD Ameritrade presents this article as an overview of how the options landscape has changed. As it points out, this may be an excellent time to explore whether options might play a useful role in your portfolio.

Leveling the Playing Field

Back in the day, only a privileged few could take advantage of things like streaming quotes and real-time option chains. Options were shrouded in mystique and deemed too complex for the average Joe -- to be traded only by "sophisticated," professional investors. Since then, however, seismic changes in the options world have leveled the playing field for individual traders and investors. Thanks to advances in technology, innovative trading tools and better access to what was once privileged information, the little guy now has the same data at his fingertips as Wall Street's movers and shakers did during their heyday -- just a few short years ago.

Getting Off the Floor

In the mid-1990s, a number of new trading software applications helped investors do things like create charts, get quotes and track portfolios. Even though a good program still cost thousands of dollars, for the individual investor (aka "the little guy"), it changed things forever. Quotes, charts and news were no longer proprietary tools of Wall Street trading firms and their favorite clients. They were there for the taking -- by anyone.

Since then, online brokerage firms have followed suit by offering customers Web-based and software-based trading platforms to find, analyze and place trades. Today, sophisticated trading platforms are no longer a barrier to entry, but rather, in most cases, a free benefit to traders. So in the modern trading world, you can now chart your favorite stock, check its fundamentals, view an options chain, analyze a spread and place the order using just one trading platform.

On a larger scale, there has also been an ongoing shift away from trading floors altogether and toward pure electronic trading. In fact, one of the largest options exchanges -- the International Securities Exchange -- is all electronic. While exchange floors still exist, they are mere shells of their former selves. That's why fewer and fewer people actually take a big chunk of change and set up shop on the exchange floor. It's expensive to do, and realistically, the odds of success aren't much better.

These days, once your order has been filled, the report hits your account within seconds. In fact, most of us are probably in a better position at home in front of our monitors today than a trader on the exchange floor was a decade ago.

A New World for Investors

Fast execution and free tools aren't the only factors that have helped to level the playing field. There are plenty of reasons that have little to do with online brokers and cool toys. Let's take a look at a few more of the majors:

1. Multiple Listing. Because there are now eight different options exchanges, and individual options contracts are listed on multiple exchanges, you can route your orders directly to the exchange where you think the best price currently exists. (You can do this on the thinkorswim from the TD Ameritrade trading platform.) However, if you want to buy a call option on your favorite stock and it's listed on eight different exchanges, your broker will usually direct the order to the exchange with the best price, taking into consideration the cost of execution and current market conditions, such as the National Best Bid and Offer (NBBO), volume and liquidity.

2. Penny Pricing. On January 26, 2007, the options exchanges kicked off a penny pricing pilot program that included 13 stocks and Exchange Traded Funds (ETFs) with options listed at one-cent increments. Since that time, the list has been expanded to more than 100. These one-cent increments are another important trend that has put more power into the hands of individual investors. No longer are we fighting 5-, 10- or 25-cent spreads between bid and ask prices; the spread on many of the most actively traded names is often just one or two pennies. This may not sound like much, but if you're trading 10 contracts at a time and can save just 5 cents per order, over 100 round trips per year will save you $10,000 in "slippage." Not bad.

3. The "Minis." New products targeted toward individual investors have proliferated. Examples include the mini-indices and mini-ETFs. Say I want to trade the Dow Jones Industrial Average. I can trade an index called the Dow Jones Industrial Index (symbol: DJX) or its related ETFs. The DJX and most of its related ETFs are designed to trade at 1/100th of the Dow Jones Industrial Average. So, if the Dow is trading at 10,000, these two instruments will trade at around 100. This smaller value means the options premiums are much lower, which also makes it much easier for individual investors to play the Dow. These are just two of the many innovative products created with the individual investor in mind.

4. Speed of Information. When it comes to active investing and trading, information truly is power, and individual investors have never had so much news, research and data. Through brokerage firms, news services and fee-based Web information sites, investors now have easy access to virtually any market-related information they might need. Streaming quotes and news means the delivery is also faster than ever.

5. Options Education. Finally, the free educational resources available today are almost overwhelming. In addition to magazines and the dozens of options trading books you can buy (or check out at your local library), some private companies offer seminars and courses for a fee. And, of course, check out the resources that TD Ameritrade can offer you. There are plenty of free online education and live event opportunities for anyone who just wants to learn more about options.

Many Different Uses

Volume in the industry continues to grow as increasing numbers of investors add puts and calls to their trading plans. According to the Options Clearing Corporation, an average of 14.385 million contracts traded each day in 2009 -- another record year.

Obviously, not everyone uses options in the same way. For example, while I might trade call spreads to play my favorite tech stock, you might buy index puts to hedge a stock portfolio. Someone else might sell puts on stocks they want to own, while another investor might trade only covered calls. There's no right strategy for every kind of investor.

The important point is this: A major shift has taken place in the world of retail options trading, and the changes that can potentially benefit the little guy are the very reasons many professional traders have taken their operations "off the floor." Now is an ideal time to educate yourself about what options can do for your trading plan. Don't be intimidated or fooled by popular misconceptions that options are too risky or too complex. We're not saying they're a walk in the park; but with a little time and effort, most can probably take the next step. Thanks to evolving improvements like better technology, easy access to information and innovative tools, the time has never been better. Really. If not now, when?

Learn More About Options at www.tdameritrade.com

To see the range of online options courses, webcasts and live workshops TD Ameritrade offers at our Education Center, log on to your account and click the Education tab on the home page. To explore specific option choices, click the Research & Ideas tab at the top of the screen, then "Options."