Over the past few years, equity options have emerged as a viable investment vehicle, shedding their previous label as a gimmick best suited to gamblers. A beneficiary of this new mentality has been online broker optionsXpress (NASDAQ:OXPS) which now accounts for nearly 3 percent of all options trades in the United States.
OptionsXpress, which raised its dividend by 25% on Friday, operates exclusively online without cumbersome retail locations to maintain. Without brick-and-mortar branches it has implemented an easy-to-use platform and sports top-notch customer service. I recently opened an account and found it to be the easiest process I've ever encountered for an online service company. They even provided a printable FedEx mailing label so I could deliver a hard copy of my application easily and free of charge. Needless to say, I was impressed. Evidently I am not alone on this count as the company was cited in 2006 by Barron's, for the fourth consecutive time, as well as Kiplinger's Personal Finance as the "Best Online Broker."
For the period ending December 31st, 2006, OXPS delivered some potent numbers to buttress its sterling reputation. Earnings increased 46% year over year with sales growing at a 45% clip. These numbers have not gone unnoticed by other online brokerage firms. Coming into 2007, only as estimated 10% of the thirty million online brokerage accounts were approved for options trading.
However, due to the success of OXPS, other online brokerages have ramped up their efforts to bring options accounts to their firms. Even Sharebuilder.com, a company noted for its long term accumulation approach, has begun to offer options trading to its clients. In this more competitive environment can OXPS continue to maintain its torrid pace of growth? Wall Street isn't so sure, beating the stock down more than 30% off its highs in the low $30's.
As usual, it is likely that the Street has over-reacted. To continue to attract new clients OXPS launched a more proactive marketing campaign, in an attempt to build its name recognition to compete with the Charles Schwabs of the world. The company currently sponsors CNBC's well-publicized Million Dollar Portfolio Challenge, a promotion in line with their goal of targeting customers both experienced in options and, more significantly, those looking for a provider with which to get their feet wet in the options game.
It's too early to pronounce their current marketing efforts a success, however I think it's absolutely the right strategy to pursue. I believe this new focus on inexperienced options traders will bear fruit considering the companies dedication to educating new traders. This emphasis on education gives OXPS a foot up on their competitors whose sites are geared towards equity and mutual fund education and training. As a result of this strategy I expect new accounts to perk up in 2007, somewhat reversing the trend of the last few months.
OptionsXpress is well on its way to becoming the leading broker serving the online derivatives market. While the company accounted for nearly 3% of all the options trading of the past year, that's still only 3%.
There is plenty of room for growth here, and it's a story that definitely merits watching. OXPS will need to continue to build its brand, but I believe its attempts to emphasize the full service (stocks, funds, etc.) capability of its operation will continue to add value to the company. Sporting a market cap just under $1.5 billion, optionsXpress looks like it has plenty of room to grow, or attract a potential buyer at a premium price. Keep your eye on this story going forward.
Disclosure: I own shares of OXPS.