OptionsXpress (NASDAQ:OXPS) is the leading online options brokerage. Barron's, Forbes, and SmartMoney have all ranked the company highly on their annual surveys. And given the company's recent announcement of another options first, these accolades are warranted.
The online brokerage firm now offers Direct Quotes through its Xspreads book, which shows the trader where opportunities for price improvement may exist before placing a spread trade. This development can potentially improve prices for customers and also leverages the company's unique platform to further differentiate it from the competition.
OptionsXpress is already an unusual company in that it focuses exclusively on the options trader, which is not a bad thing. Options traders are more active traders and therefore generate more commissions. The group as a whole also tends to have a higher net worth than regular equity traders and has been woefully underserved by online brokerages such as Ameritrade (NASDAQ:AMTD), Motley Fool Stock Advisor selection Schwab (NYSE:SCH), and E*Trade (NYSE:ET).
The company's key strength is its deep understanding of how to serve the options market. It has built a trading infrastructure that suits traders and focuses on the needs of its niche market, such as best-in-class trade execution and proper margin calculations. For example, it allows spread trading inside an IRA, which is a valuable differentiator for serious traders.
The options market is a growing market -- the Options Industry Council reported 18% growth in equity options trading over last year. International Securities Exchange (NYSE:ISE), the largest U.S. options exchange, also reported 17% growth in options volume in the month of July over 2004 figures. I expect the growth to continue as individual investors begin to implement basic options strategies such as covered calls and puts in their portfolios.
OptionsXpress is perfectly placed to take advantage of twin trends in the options industry -- a growing options industry driven by institutional and corporate risk management, as well as growing interest by individual investors in implementing options strategies.
However, unlike my fellow Fool Tom Taulli, I don't think the company is ripe for being bought out. It would be difficult for any online brokerage to really integrate the two trading platforms, given the wide disparity in technology (Xspreads, for example), and any potential acquirer would most likely have to continue to operate the company as a separate entity. This would decrease the attractiveness of an acquisition, given the lack of synergy. In addition, the company is already hitting on all cylinders and knows it, making an acquisition price probably too rich for any company's blood.
The stock is not exactly cheap at a forward P/E of 23, but the outstanding operating margins of 60%-plus does make this price easier to pay. Given the stock's volatility, there could be a bargain opportunity in the future. Any whiff of a slowdown in options trading -- warranted or not -- could cause an excellent buying opportunity.
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Fool contributor Stephen Ellis does not own shares in any of the companies mentioned.
