IB Traders’ Insight

View The Latest Videos View Videos


Options

Thomas Peterffy's Next Move


The founder of Interactive Brokers may now be preparing a challenge to the nation’s biggest banks.

 

Forget about Dow 23,000. What matters more than milestones is identifying investments that can prosper in a low-volatility market and thrive when high volatility returns.

It isn’t easy to unearth those opportunities, which is probably why Interactive Brokers Group (ticker: IBKR) isn’t better known. The company reported strong earnings last week, and though the stock is up some 35% this year, investors arguably don’t fully appreciate the strength of the business.

For the first time, the company’s operations are free of a capital-intensive, market-making unit that should let investors more clearly see the company’s power. In late September, Two Sigma Securities, part of a giant hedge fund, completed the deal to buy Timber Hill. Interactive Brokers is now essentially a muscular, electronic brokerage firm that offers, among other attributes, a pure play on higher volatility.

If stocks drop, and the CBOE Volatility Index, or VIX, reverts from about 10 to its long-term average of about 19, Interactive Brokers should perform exceedingly well as most other stocks struggle. Higher volatility usually encourages investors to trade more, which means Interactive Brokers should make more money during a crisis.

“Investors view IBKR as a play on higher volatility with somewhat limited downside,” said Sandler O’Neill’s Richard Repetto.

During the third quarter, Interactive Brokers reported revenue of $426 million, up from $345 million in the year-ago quarter. Earnings per share of 44 cents exceeded the consensus estimate of 38 cents.

We have recommended Interactive Brokers stock since it traded in the $20s. Our view remains animated by respect for Thomas Peterffy, the company’s founder, chairman and chief executive. A self-made Hungarian immigrant, Peterffy long ago harnessed technology so he could better trade options for himself when he just owned and operated the Timber Hill trading firm. He then used what he had learned to build Interactive Brokers, which delivers institutional-quality trading technology to investors at essentially wholesale prices.

We think Peterffy is preparing to seriously challenge major banks, including Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC), in the same way he used technology and low fees to disrupt the businesses of traditional brokerage firms.

On the investor call after the earnings release, Peterffy offered a hint of the future. He talked about the firm’s just-released debit card, and noted that clients can now borrow, save and invest without leaving the Interactive Broker’s platform. The card is available in America, and will be introduced in Europe and Canada in the next six months, then Asia.

THE INTEREST RATE on the Interactive Brokers debit card is simply astounding. Investors can borrow money at interest rates of 1.41% to 2.66%. This foray into banking isn’t fully appreciated by investors and, arguably, neither is it reflected in the stock price.

Investors have three primary choices in situations like this. They can simply buy stock; sell puts and hope to buy stock on a decline; or they can use the “half-and-half” strategy to build positions. If investors want to hold 1,000 shares, they would buy 500 shares and sell five puts.

With the stock at $49.05, the December $48 put could be sold for about $1.10. If the stock declines below the put strike price, investors are obligated to buy shares. If the stock advances, investors can pocket the put premium, and do the trade yet again.

Regardless of the chosen approach, it’s likely investors will find that Interactive Brokers is a company with a lot of blue sky in front of it.

 

Steven M. Sears is a Senior Editor and Columnist with Barron's. He is the author of "The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails." Mr. Sears previously reported for Dow Jones Newswires and The Wall Street Journal. He has reported upon most major modern financial events, including the Asian Contagion, the bursting of the Internet Bubble, the Credit Crisis, and Europe's sovereign debt crisis. He also was part of exchange executive teams that modernized the U.S. options market, and introduced electronic trading. Interact with him on Twitter @sm_sears.

Get investing analysis that moves stocks and markets—Subscribe to Barron’s for just $1 a week.

This article is from Barron's and is being posted with Barron’s permission. The views expressed in this article are solely those of the author and/or Barron's and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


15057




Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.