Active Traders' Holiday Wish Lists

There are special treats in the toolbox for readers wishing for easier options trading.
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Yes, we're a day early this week. From now on my Tools of the Trade column will appear on

TSC

first on Friday, and then again on Saturday. If you're a first-time reader, welcome to the

TSC

column that evaluates financial Web sites, online brokers, trading software and other tools aimed at active traders.

Regular readers may recall from last week that I

asked for your holiday trading wish lists -- your suggestions for trading tools, Web applications, whatever you'd like to see from your broker or the many financial info sites we cover here. Thanks for all your responses. Here's a selection.

Options Fair and Square

Several readers wanted better ways to trade options. For example,

Joe Galbraith

, who's based in Florida and trades several large accounts, would like "the ability to route option orders directly to the appropriate exchange:

Amex,

Chicago Board Options Exchange, the

Philadelphia Exchange, the

Pacific Stock Exchange and the

International Securities Exchange. It is hard to get a good execution prices with options at the open," Joe explains. "One exchange may open a particular option before another. I've had orders delayed for more than a half an hour as the market maker lets a stock run in his favor before opening trading in a particular option."

If Joe were trading

stocks

through a direct-access broker, a feature built into his trading software called intelligent order routing would seek out the best price, by automatically polling all the exchanges, ECNs and market makers. (See this

story to learn how it works.)

Nothing as advanced as equity intelligent order routing exists with options trading as yet. However, early next year, the CBOE is expected to debut an options trading network similar to an ECN that will directly match buyers and sellers. Meantime, the

Securities and Exchange Commission

continues its push for more transparency and improved order handling to help options traders receive the best price.

Nevertheless, options trading remains largely controlled by the specialists and market makers at the various options exchanges and trading networks. There's simply not enough liquidity with options contracts for individual traders to play a meaningful role. Brokers like

Wall St. Access

and

Charles Schwab

can manually work orders through each of the exchanges, as I talked about in a previous

column.

Options Education

Ray Buccino

, who is retired and trades from Texas, wanted more sites that might help him improve his options trading. "What I am looking for," he says "are sites that combine good educational material with good advice. I don't mind paying for it." Ray's already checked out a lengthy list of sites. His list is impressive enough to be worth sharing. "The most useful," he says, "are marked with an *." Here they are:

Option Investor *

Optionetics.com *

Options Central *

Equity Analytics

OptionSmart.com

InvestAnswers.com

Mr. Stock

Institute for Options Research *

ino.com

IVolatility.com

The Option Strategist.com *

CMI's Option Trading 2000

PowerOptions

CoveredCalls.com

ValueLine.com

CyberInvest.com

Chicago Board Options Exchange *

Chicago Mercantile Exchange

schaeffersresearch.com

I'll add just a couple of sites to Ray's list. The

University of Illinois Office for Futures and Options Research contains online calculators that let you work through options strategies and features a great collection of options links. Also, online brokerage

Ameritrade

has an options simulation game called

Darwin that allows you to test options-trading strategies before risking real money.

Put/Call Particulars

Still on the subject of options,

Stefan Wallgren

wanted to know where he could find put/call ratios on individual stocks. The put/call ratio helps traders measure market sentiment. Generally, the more that ratio leans toward

put buying, the more likely the market will decline. If the ratio favors

call buying, it's generally bullish. However, some people see the put/call ratio as a contrarian indicator, so it's hardly an exact science. You can get hourly updates of the aggregate put/call ratio for options trading on the

CBOE.

Finding the put/call ratio on individual stocks requires some tinkering, however. Enter a stock symbol at the CBOE site, and you get what's called an options chain. This is a list of all the contracts currently available to trade, along with their

strike prices and

expiration dates.

Next, click on the heading that lets you download this feature in text format. You should be able to import the text file into an Excel spreadsheet. From there, you'll need to add up the open interest in both puts and calls to calculate the ratio. (Time to take out that Excel manual!)

But be forewarned, the put/call ratio on an individual stock isn't always a reliable indicator of sentiment on that stock. People trade options for many purposes. For example, a company might sell hundreds of puts to acquire its own stock at a specific target price as part of a stock buyback program. The large number of puts might appear bearish, even as the company insiders who sold the puts hope the stock will rise.

The Throw-in-the-Towel Key

Troy Hickok

started trading actively about one year ago. "The markets have been just plain nuts since I've started," he laments. To protect his account from crushing volatility while he's working his day job, Troy says he'd like something he calls an "overall account level stop." As Troy explains it, "If I have -- say -- 12 positions open at once, and my account balance falls below a certain stop I choose, the program will auto sell at market, my entire portfolio. It may sell only the down positions, while holding all others as long as the account balance doesn't fall any further. This would ensure that I at all times have complete control over my account balance. Coming home to find out I'm down 20% for the day can be slightly brutal!"

A terrific idea. But a tough order. Some direct-access trading platforms might have a feature you can adapt. They allow you, for example, to enter multiple orders. (Here's a

list of platforms.) Many traders will tell you that it's best to have an exit strategy and a requisite stop for each stock you own.

But if that sounds like too much work for you, think about simplifying your portfolio and diversifying it as well through exchange-traded funds (

ETFs), such as

Nasdaq 100 unit trust

(QQQ) - Get Report

shares or any of the numerous sector ETFs that exist. It's easier to trade a single index or sector ETF than it is to hold numerous positions in individual stocks. You can read about ETFs on Saturdays when

TSC

publishes its weekly ETF wrap-up.

Troy's request transitions nicely into something

Donn Burkholder

put on his wish list. Donn daytrades from his home in Michigan, and in a down market he'd like to level the playing field for short-sellers. Specifically, he wants "an equal uptick rule for those !#$% *!$ short-selling Nasdaq market makers."

It's true. Market makers -- wholesale traders who act as buyers and sellers of last resort -- are exempt from the Nasdaq rule that requires a stock to trade on an uptick before the rest of us can short it. Market makers are exempt from the rule in theory so they can readily meet buyer demand for shares by selling borrowed shares. Because they don't have to wait for an uptick, they can short shares to meet demand without constraint. If everyone were exempt from the rule, stocks would plummet relentlessly.

If you want a sure way to short a down market, use ETFs, which are likewise exempt from the uptick rule. Normally ETFs don't fluctuate as wildly as individual stocks -- a good thing if you're a buy-and-hold investor, bad if you're a daytrader or a swing trader who holds stocks over a number of days. But recent market volatility should allow daytraders, and especially swing traders, to squeeze out some handy profits by alternately going long or short ETFs.

A Safety Net

Looking over all the wish-list items you get the idea that it's a dangerous world out there. Everyone who emailed me wanted ways to protect themselves from the brutal bears of winter. Maybe that's why I especially liked a wish-list suggestion from

Brendan DeLamielleure

. A former professional trader, Brendan now daytrades from his home in Missouri. He wishes his direct-access broker would offer group-rate health insurance. Better yet, brokers should give it away to their active trading clients just like they give away quotes and news services.

Until that day comes, check out

eHealthInsurance.com or

insure.com.

Best wishes to all of you for the holidays.Mark Ingebretsen is editor-at-large with

Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

mingebretsen@onlineinvestor.com.

Mark Ingebretsen is editor-at-large with

Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

mingebretsen@onlineinvestor.com.