Is Schwab stealing optionsXpress?

Be more bullish about the broker if it can seal the deal.

By Motley Fool Pick of the Day Mar 21, 2011 1:54PM

By Rick Aristotle Munarriz

 

Sector consolidation is back among the discounters in the brokerage space. Charles Schwab (SCHW) is buying optionsXpress (OXPS) in a deal that's valued around $1 billion.

 

The leading discount broker is offering 1.02 shares for every share of the options trading specialist. The value will fluctuate as Schwab's stock goes up and down, but it was a 17% premium based on Friday's close of both equities.

 

It's a great deal for Schwab. It's nabbing a rising star in options trading at the right time and at a small premium. The same can't necessarily be said for optionsXpress. Its shares traded as high as $21.07 just three months ago. Why is it cashing out for less than $18 based on the initial deal?

 

All of the discounters had a spectacular February. E*TRADE (ETFC), Interactive Brokers (IBKR), and TD AMERITRADE (AMTD) joined Schwab and optionsXpress in posting double-digit gains in year-over-year daily average revenue trades last month.

 

Broker

Feb. 2011 vs. Feb. 2010

Feb. 2011 vs. Jan. 2011

E*TRADE

34%

3%

Charles Schwab

21%

(7%)

optionsXpress

37%

6%

Interactive Brokers

15%

2%

TD AMERITRADE

31%

0%

 

Market volatility will do wonders to light a fire under dormant traders. It's also a great time to specialize in options.

 

It's fairly easy to recognize the attractiveness of options when the market's rockier than Balboa. Calls and puts offer leveraged wagers on the volatility for risk takers, while covered call strategies can help offset the equity ownership risk for conservative investors.

 

Schwab already offers options trading through its discount brokerage, but now it can make a more concentrated bet on a company built for volatility. It's not really a surprise to see optionsXpress lead the way with its 37% year-over-year spike in daily average revenue trades in February.

 

If Schwab is able to seal this deal, it's hard not to feel more bullish about the broker. There will be cost-saving synergies to make the combined company more profitable than it would be on its own. It will also benefit discounters in general because there will be one less player to launch a pricing war.

 

This also might not be the end to the consolidation wave. If TD AMERITRADE has ever wanted to get cozy with E*TRADE, there's now one couple already out on the dance floor. This year may be the sequel to 2005's wave that found BrownCo, Harrisdirect, and TD Waterhouse snapped up.

 

Schwab may own optionsXpress, but everybody here suddenly has acquisitive options, too.

 

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990 but he does not own shares in any of the companies in this story. Interactive Brokers Group, optionsXpress Holdings, and Charles Schwab are Motley Fool Stock Advisor picks. The Fool owns shares of Interactive Brokers Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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