A Homerun on Options Trading

07/22/2005 12:00 am EST

Focus:

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, recommends an "options play" that does not involve buying options. Here, he looks at an online brokerage firm involved in the options trading market, which he believes has "all the making for a homerun stock".

"With a stock-market capitalization of $974 million dollars, OptionsXpress Holdings (OXPS NASDAQ) is a small-cap company providing online brokerage services to the fast-growing options-trading market. The stock is all about options. There is no doubt that options-trading volume is in the midst of a massive bull market since 2000. More investors and institutions are trading options to either augment their returns or protect their downside in the market. OXPS doesn't need an expanding economy to generate profits, because earnings are derived from alternative trading products such as derivatives, not from consumer durables or non-durable sales like stocks that constitute the Dow industrials. Plus, if stocks tank again one day, their profits won't be linked to a softening economy.

"OptionsXpress went public in January 2005, and like most initial public offerings, quickly surged and then reversed sharply over the winter, hitting a post-IPO low in May. That's where it gets interesting. Today, OptionsXpress is up 20% from its May low. But that's peanuts compared to where we think this stock is heading. With the stock looking good technically, now is the time to bite at this stock. On top of that, the fundamentals make a strong case for buying. OptionsXpress saw client assets rise 9% in April. More impressive was the incredible surge in client assets from 12 months earlier, up a sharp 74%. Then in June, the company announced its first-even dividend since going public, which is another positive sign that the company is making money and returning some equity back to shareholders.

"In addition, the stock is supported by heavy insider buying since late May. The company's CEO, David Kalt, bought shares at an average price of $13.18 on May 19 worth $694,000. Though insider buying is not a guarantee a stock is going higher, it's usually a very bullish signal. When executives at a publicly-traded company buy stock with cash on the open market, it's a sign that they think the stock is undervalued. With a low price, heavy insider buying more than 10 times the average for US executives and a booming client base, OptionsXpress Holdings has all the ingredients for to be a real winner for any kind of market. Buy OptionsXpress at market up to $17.75 in order to ride the options-trading bull market."

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