Tuesday, January 03, 2006

Options Galore: OXPS

Options trading is breaking out like wildfire.

Over the weekend, Barrons reminded us that 1.5 billion options were traded in 2005 -- a 27% spike from 2004.

This could only mean one thing: buy OptionsXpress (OXPS), our first pick of 2006.

OXPS is beautifully positioned to harvest the fruit of the current option craze.

The company boasts 100,000 customers; 80% of its revenues come from option trading.

Not one analyst sell rating across the Street -- not bad so far.

It gets better.

According to Investors Business Daily, OXPS, which "went public in January, has grown at a rapid clip. At the end of October it increased the number of accounts by 67% from the prior year to 152,400. Annual earnings averaged 129% growth from 2003 to 2005. Revenue grew an average of 107% a year over the same period..."

Experts estimate that of the roughly 30 million online brokerage accounts, between 10% and 15% trade in options, pegging the market close to 3.5 M investors who trade in options.

OptionsXpress only has only a small piece of that market, but not for long -- we forsee plenty of growth opportunity for OXPS.

The more intimate US investors get with option writing, the better OXPS's prospects; surprisingly, online brokerage giants like Ameritrade (AMTD) have not been able to fully penetrate OXPS's niche.

The irony: option volume has soared in 2005 even as volatility declined or stayed low — an indication, opines Smart Money, that "trading is driven not just by expectation of stock movement, but by hedging and the selling of options to drum up income."

The good news is that traders are expecting volatility in 2006 to surpass that of 2005 -- options thrive off volatility.

If the average retail investor gets hooked on options -- and/or volatility baloons in 2006 -- we may have ourselves a home run.

We initiate coverage today with a buy rating.

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