Retail investors are serious about options trading, but do they have tools to handle all the number crunching for each trade and decide which strategies fit their appetite for risk?
A Redmond, Wash., startup wants to make it easier for retail investors to analyze different investment strategies and play a market forecast for a stock.
In early September, Quantcha Inc. launched Options Search Engine, a set of tools for searching, filtering, and analyzing stock market investments aimed at retail investors.
Quantcha president Ed Kaim sees a void in the investment software available to retail options investors. His search engine provides in-depth analysis of options investment strategies based on a forecast of the price and risk/reward tradeoffs.
“We’re trying to make it easier to find the optimal options trade,” says Kaim who is also the CEO of SharpLogic, a platform for developers. He is bringing tools to improve the experience of the retail options investors.
Quantcha’s search engine allows the investor to input a forecast price and an expiration date for the stock, along with a “trade budget” -- how much he or she wants to invest -- and risk/return level. “This is the maximum liability you could lose,” says Kaim. “When you put in a budget, we won’t show you potential trades that have the potential to lose money for you more than your maximum.” In addition, Quantcha factors in the brokerage commissions and fees per contract as part of the trade discovery process. Some tools don't provide the costs until reaching the last order placement screen, he says.
After an investor enters this information, it generates a list of hundreds if not thousands of investment strategies. The search engine applies more than two-dozen different trading strategies in order to determine the best trades for the given forecast. “We’ll go through all the different combinations of spreads you can do,” explains Kaim, citing spreads, butterflies, condors, and something called a Call Christmas Tree. In a demo, the OSE generated 1,600 potential trades for the forecast, but after Kaim entered a trade budget and a maximum 2% return, it filtered the list down to 629 trades.
In a recent commentary on Tabb Forum, Kaim stirred up controversy with the headline, "Retail Options Trading Is Broken. Here Are 3 Ways to Fix It," writing that “retail options investors aren’t even as successful as retail investors who don’t trade options in the first place.”
The idea for the product came out of his experience with trading options. As his strategies became more sophisticated, Kaim found it took a lot of work to analyze each trade, but he couldn’t find any investment tools to help him.
“A lot of times you get a forecast for a stock. For example, Microsoft is going to close between $48 to $52 at January 17. But there are so many strategies you can take and do spreads on,” he tells us.
“There are tools that scan the options based on the strategy. You might say I’m interested in placing a condor trade, and they’ll scan and show you the strategies. We say, where do you think the stock is going to go, and we show you the type of strategies you should be considering.”
Since most retail investors are not quants, investment tools should do more of the heavy lifting in terms of determining the best strategies, says Kaim.
In the Tabb Forum commentary, he wrote: “If an investor thinks a stock will close between $45-$50 on Jan. 17, 2015, and is willing to risk up to 25% of a $1,000 investment, then it should be the tool’s responsibility to figure out the right strategies to apply and present the best options to pick from.”
He compares it to going to a travel site and having to pick the flight based on the type of plane. It should be more about the destination city, the time of day, and the price one wants to pay.
Currently, Quantcha is in the process of persuading online brokers to allow it to connect with their trading systems so that investors can seamlessly place an order after they do the analysis and select a strategy. “We’re connecting to different brokerages so that you’ll begin the trade workflow from our site or from the widgets that are on other sites.”
Sharing and collaboration
Investors can share their forecasts and trade ideas via email and social media including Facebook Twitter, Pinterest, and StockTwits. Going forward, Kaim wants to allow others to embed frames on their sites. If a professional recommends a strategy, they can model the trade using Quantcha’s widget and grab the HTML code and paste in into their sites and show it next to their recommendations.
Factoring in brokerage fees and commissions is part of the investment analysis process. With other tools, investors may not find out what commission and brokerage fees are until they are on the last screen about to submit an order, contends Kaim. Also they may be doing their analysis on another site and then need to retype all the details into an order entry panel.
“From my conversations with retail investors, they get advice from sites like Motley Fool and Street.com. They take the advice and then they have to enter all those positions by hand into a tool.” This can entail switching back and forth, typing in volumes and strike prices. They do that one or two times before they get to the total commission screens.
Investors share their trade ideas through six social media sites including Twitter, Facebook, Pinterest, and StockTwits. “There’s a lot we can do with sharing and syndication.”
One thing that surprised Kaim is that investment software was not using the latest technology. “It’s sort of like I discovered a tribe in the Amazon, and this tribe has not seen the outside world. They’re using bows and arrows to hunt down animals.” Quantcha is using modern web software, emphasizes Kaim. The web app runs on laptops, desktops, tablets... any device. All the data comes down to the phone, tablet, or laptop without making constant trips to the server.
Quantcha’s OSE is free to investors, and no registration is required, though users who sign up can receive other value-added information such as watch lists.
As an outsider who comes to finance from a tech background, Kaim says he can improve the option investor’s experience.
“There is no way someone can go through this experience and not have the information,” he says. “They are armed before they make the trade.”Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio