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Options Theme: More

By most counts, 2004 was a banner year for the option industry. There was more volume, more competition, more access and more acceptance of options by the mainstream as a valuable instrument for investing. The net result is that investors now enjoy access to the most open and cost-efficient options markets ever. Yay options!

According to the Options Clearing Corp., option volume crossed 1 billion contracts in November, marking the first time trading has surpassed that milestone in one calendar year. The final tally for 2004 should come in around 1.2 billion contracts, a 31% increase from 2003. Average daily volume has been 4.6 million contracts, a similar percentage increase from 2003's average daily volume of 3.6 million contracts.

Juiced by Electricity

Many factors are responsible for the incredible volume growth, but probably the most important one has been the expansion of electronic trading. It has reduced the cost and increased the accessibility of option trading: Commission fees have declined dramatically, with many online brokers now offering rates around $15 per trade, which is comparable to equity transactions.

Just a few years ago, even as several thousand shares of stock could be traded for $10 or less at many well-known brokerage firms, the commission fees on options were still hovering at $50 or more. Paying $100 per round trip to trade an item with a notional value that can be as low as $20 is very unappealing for small-lot traders. It certainly would start the position in a deep hole.

Electronic trading platforms, the related linkage between exchanges and smart order routing, have resulted in tighter bid/ask spreads and better fills, which effectively lowers execution costs. This is not to say you can't still encounter a market that "moves away" as soon as you enter an order, or other frustrations associated with trading in an illiquid market. But on the whole, markets are more transparent, quotes are honored and orders are better represented than they have been in the past.

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