One of the few certainties in themarket is that investorswill
always search for new ways toprofit . And there is one strategy
that continues togain popularity.
That's because it enables investors to makemoney regardless
ifstocks go up or down. It also provides the potential for
investors to score biggains with very little risk.
I'm talking about options. In response to market volatility
and uncertainty in the past four years, options strategies
continue to gain popularity with both institutional and
While that has been beneficial to leading financial exchanges
CME Group (
Intercontinental Exchange (
that carry options contracts, there is another financial exchange
that offers unmatched exposure to growth in
Chicago Board of Options Exchange (Nasdaq:
is the undisputed leader in the domestic options market, boasting
28%market share whileoffering options onequities ,equity indexes
and exchange-tradedfunds (ETFs ). Founded in the early 1970s, the
company went public just three years ago, cashing in on the trend
of financial exchangesgoing public .
Much like the stocks of other financial exchanges, CBOE has
been surging in 2013, withshares up 61% on theyear . Take a look
at the big gain below.
But the CBOE is different than the other publicly traded
financial exchanges. As an options specialist, the CBOE is the
purest play on the options market. That places the exchange in a
unique position tocash in on the growing popularity of options
and increased market volatility.
And that's exactly what is happening. The CBOE continues to
see impressive results from two of its most important proprietary
The first is itsVIX (volatilityindex ) contract, with
bothfutures and options trading volume exploding in the past
July trading data showed thatVIX futures volume was up 53%
from last year, while VIX options volume was up 36%. That has VIX
futures volume up 99% on the year from 2012, already breaking
2012's volume record in the first eight months of the year. The
growing popularity of the CBOE's VIX complex is a powerful engine
of growth as traders continues to search for more opportunities
to speculate on volatility and investorshedge unwanted portfolio
||© Chicago Board of Options Exchange
||The trading floor of the Chicago Board of Options
Exchange in 2007.
Looking tocapitalize on the big popularity spike in VIX
futures and options, the CBOE is on schedule to extend VIX
futures trading by 45 minutes from its current closing time in
September. Phase 2 of the initiative will enable its European
clients to trade during regular domestic hours.
The CBOE is also seeing impressive gains with a new line of
weekly contracts linked to its high volume and extremely popular
S&P 500 (
contract. Through July, trading volume in the weekly SPX
contracts was up 147% from last year, nowaccounting for 25% of
total SPXrevenue as opposed to just 15% in 2012 and 9% in 2011.
CBOE has noted that growing interest from retail investors has
fueled the popularity of the weekly expirations, and has plans to
launch a new daily contract that should provide stimulus for
additional volume and revenue growth.
The recent string ofearnings growth has strengthened the CBOE's
financial profile. It has cash and equivalents of $208 million
with nolong-term debt . That led CBOE to increase itsdividend by
20% last year to 18 cents, yielding 1.4%. It will alsosupport
additional shareholder value, with $100 million remaining on the
board's $200 million share repurchase program.
The CBOE could also be anacquisition ormerger target. The
financial exchange industry has gone through a massivewave
ofconsolidation in the past five years that is stillin play . The
CBOE's options business would be a highly
attractivediversification strategy for an international futures
or equity exchange.
The encouraging outlook has theconsensus estimate calling for 19%
earnings growth in 2013, 16% earnings growth in 2014 and 13%
annual earnings growth in the next five years.
Risks to Consider:
CBOE has been surging in 2013, with shares up 61% in the past
seven months. Although the valuation still looks reasonable, that
gain has not been accompanied by equal earnings or projected
earnings growth. A pullback could trigger a wave of
Action to Take -->
The CBOE is benefiting from growing interest and trading volumes
in options, lifting shares to a 61% gain in 2013. But with high
margins, barriers to entrance and a strong financial profile this
is also a company to own for the long haul. With a forwardP/E
(price-to-earnings) ratio of 24, in line with its peers but a
premium to its higher-growth 10-year average, shares look a bit
extended in the short run, making any weakness a chance to
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.