While you may already be familiar with the New York Stock Exchange and Nasdaq, those aren’t the only exchanges that investors use to trade securities.
One such exchange is CBOE Global Markets, the world’s largest options trading exchange. Cboe has also created one of the most popular volatility indices in the world.
Related: How to trade options
What Is the CBOE Options Exchange?
Cboe, or CBOE Global Markets, Inc., is a global exchange operator founded in 1973 and headquartered in Chicago. Investors often turn to Cboe to buy and sell both derivatives and equities. In addition, the holding company facilitates trading over a diverse array of products in various asset classes, many of which it introduced to the market.
The organization also includes several subsidiaries, such as The Options Institute (an educational resource), Hanweck Associates LLC (a real-time analytics company), and The Options Clearing Corporation (a central clearinghouse for listed options). The group has global branches in Canada, England, Ireland, Netherlands, Hong Kong, Singapore, Australia, Japan and the Philippines.
Cboe is also a public company with a stock traded on the Cboe exchange.
What Does CBOE Stand For?
Originally known as the Chicago Board Options Exchange, the company changed its name to Cboe in 2017.
History of the Chicago Board of Options Exchange
Founded in 1973, CBOE represented the first U.S. market for traders who want to buy and sell exchange-listed options. This was a significant step for the options market, helping it become what it is today.
In 1975, the Cboe introduced automated price reporting and trading along with The Options Clearing Corporation (OCC). Other developments followed in the market as well. For example, Cboe added “put” options in 1977. And by 1983, the market began creating options on broad-based indices using the S&P 100 (OEX) and the S&P 500 (SPX).
In 1993, the CBOE created its own market volatility index called the Cboe Volatility Index (VIX). In 2015, it formed The Options Institute. With this, Cboe had an educational branch that could bring investors information about options. CBOE continues its educational initiatives. The Options Institute even schedules monthly classes and events to help with outreach.
From 1990 on, Cboe began creating unique trading products. Notable introductions include LEAPS (Long-Term Equity Anticipation Securities) launched in 1990; Flexible Exchange (FLEX) options in 1993; short-term options known as Weeklys in 2005; and an electronic S&P options contract called SPXpm in 2011.
Understanding What the CBOE Options Exchange Does
The CBOE Options Exchange serves as a trading platform, similar to the New York Stock Exchange or Nasdaq. It has a history of creating its own tradable products, including options contracts, futures, and more. Cboe also has acquired market models or created new markets in the past, such as the first pan-European multilateral trading facility (MTF) and the institutional foreign exchange (FX) market.
The Cboe’s specialization in options is essential, but it’s also complicated. Options contracts don’t work the same as stocks or ETFs. They’re financial derivatives tied to an underlying asset, like a stock or future, but they have a set expiration date dictating when investors must settle or exercise the contract. That’s where the OCC comes in.
The OCC settles these financial trades by taking the place of a guarantor. Essentially, as a clearinghouse, the OCC acts as an intermediary for buyers and sellers. It functions based on foundational risk management and clears transactions. Under the SEC and CFTC, it provides clearing and settlement services for various trading options. It also acts in a central counterparty capacity for securities lending transactions.
CBOE Products
Cboe offers a variety of tradable products across multiple markets, including many that it created.
For example, Cboe offers a range of put and call options on thousands of publicly traded stocks, exchange-traded funds (ETFs) and exchange-traded notes (ETNs). Investors use these tradable products for specific strategies, like hedging.
Or, they use them to gain income by selling cash-secured puts or covered calls. These options strategies give investors flexibility in terms of how much added yield they want and give them the ability to adjust their stock exposures.
Investors have the Cboe options marketplace and other alternative venues, including the electronic communication network (ECN), the FX market and the MTF.
CBOE and Volatility
The Cboe’s Volatility Index (VIX) gauges the market volatility of U.S. equities. It also tracks the metric on a global scale and for the S&P 500. That opens up an opportunity for many traders. Traders, both international and global, use the VIC Index to get a foothold in the large U.S. market or global equities, whether it be trading or simply exposing themselves to it.
In early 2021, Cboe Global Markets announced a change that would occur later in the year. The market operator intends to extend global trading hours (GTH) on Cboe Options Exchange for its VIX options and S&P 500 Index options (SPX) to almost 24 hours per business day, five days a week. Using this update, they hope to give further access to global participants to trade U.S. index options products exclusive to Cboe. These products are based on both the SPX and VIC indices.
This move allows Cboe to meet growth in investor demand. These investors want to manage their risk more efficiently, and the extended GTH will allow them to do so. With it, they can react in real-time to global macroeconomics events and adjust their positions accordingly.
Essentially, they can track popular sentiment and choose the best stocks according to the VIX’s movements.
The Takeaway
While Cboe makes efforts to educate and open the market to a broader range of investors, options trading is a risky strategy that investors should fully understand before implementing it. Investors should recognize that while there’s potentially an upside in options investing, there’s usually also a risk when it comes to the options’ liquidity, and premium costs can devour an investor’s profits. That means it’s not the best choice for those looking for a safer investment.
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This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options. Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Investing in retail stocks
Walking into a favorite store may bring on a little rush of adrenaline with the anticipation of buying something needed, wanted, or longed for. Items are diligently picked up and tried on or tested out, being examined for a potential purchase. Time, effort and money are invested in the decision about which items to add to the shopping cart.
There’s a wave of joy upon checkout with the realization that the new favorite item will soon take its place in its new home. When a shopper spends a lot of money in a particular store, they might wonder whether they should be investing in that company. Enter: retail stocks.
Retail stocks may seem like a good idea to most as it’s one of the most tangible trades. We all have favorite stores and favorite products, so it is a natural correlation to want to invest in the company that makes said goods.
However, retail stocks can be tricky. Especially in today’s retail ecosystem. Here’s everything you need to know about retail stocks before diving headfirst into the market.
Related: What is impact investing?
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All stocks represent partial ownership — a share — in a business. The owner of a stock is entitled to a percentage of the profits in that business. That percentage is based on the number of shares in a company one owns. This is often called earnings.
Retail stocks cover the retail industry: stores that sell physical goods such as clothing, books, computers, homeware, tools, groceries, auto parts and more.
Owning retail stocks is essentially partial ownership in any business within the retail industry that sells goods directly to a consumer for personal use through a store or e-commerce website.
DepositPhotos.com
Though this can change rapidly in the market, some of the biggest — and most recognizable — retail stocks include Amazon, Walmart, Target, Costco, Best Buy, Home Depot and Lowe’s.
There are many others including TJX Companies, which owns TJ Maxx and Marshalls, as well as The Gap, Sears Holding, CVS Health Corporations and thousands more.
Wolterk / istockphoto
Remember the olden days when the mall was the place everyone’s mom drove them to pick up a few items for back-to-school shopping? Or, for the really lucky, there was catalog shopping. It was a simpler time when shoppers could only buy things in person.
That was the reality until the internet came along and changed everything forever. More specifically, that was until Amazon came around and changed retail for good.
In 1994, Jeff Bezos launched a digital bookstore known as Amazon. Since then, that small, online operation has grown into one of the most profitable businesses in the world.
However, with all that success Amazon also changed the retail industry forever, swallowing up competitors, mom-and-pop shops and brick-and-mortar stores along the way.
Because of the moves Amazon has made over the last 25 years, retail has had to change alongside it. That meant more stores having to move into the digital space, creating an entire ecosystem of e-commerce websites.
And large chains like Walmart, Target, Sears and Home Depot had to adapt, too, as Amazon began to sell the same merchandise at often better prices and with faster delivery times.
These stores and others then had to become what is known as omnichannel, offering both online and in-store offerings. Chains like Target began offering online ordering with in-store return or exchange. Though these are two separate business models, they now have to operate as one.
This shift in consumer focus to online shopping also changed the stores along Main Street, USA, into more of a marketing tool and destination rather than a first point of sale.
Over the last few decades, stores have had to adapt to create exclusive consumer experiences only found in-store. Those in-store activations look like the Geek Squad at Best Buy, and the Apple Care experts in-store, or Ulta Beauty’s salon experiences.
Those that couldn’t keep up with the changing times had to shutter their doors. According to the global marketing research firm Coresight Research, nearly 9,100 store closures were announced in 2019 alone. That marked a 55% jump in total closures from 2018.
Those closures included Payless Shoes, craft store A.C. Moore, DressBarn, Barneys New York and more closing physical stores.
Jorge Villalba/istockphoto
Deciding to invest in retail stocks is truly a hands-on affair. Evaluating a stock takes time, but one of the best ways to assess whether to invest is visiting a few physical locations. This way, an investor can get a sense of what’s happening on the ground.
Is the store selling timely merchandise? Is the store well lit, and well laid out? Is there a lot of foot traffic? All of these are signs that the store is probably in good financial health.
After visiting a store’s physical location, a prospective investor might want to check out its online presence, too. If it doesn’t have one, that’s a problem.
However, if the store’s e-commerce operation seems strong and includes similar merchandise to its in-person locations, is easy to navigate, and offers customer service, this, too, points to the good health of a company.
fizkes / istockphoto
Next, it’s time to dig deeper into the company’s finances. With this, it could be a good idea to look into the Four Rs of Investing in Retail: return on revenues, return on invested capital, return on total assets and return on capital employed.
• Return on revenue indicates how much net income the company made — or profited — after paying employees, taxes, supplies, or any other outflows.
• The return on invested capital is the amount of profit a company made per store. This is a key metric for larger chains as it also shows how quickly each location was able to return the capital invested to open its doors. It can be an indicator of how fast a larger retailer may be able to grow its profits.
• The return on total assets looks at the total profits made from a company’s total assets. This, again, is a key metric for larger companies like Amazon that own multiple businesses (e-commerce, cloud computing, a music arm and more).
• Finally, return on capital employed is a bit more nuanced but shows how well a retailer uses its own capital. According to Investopedia, this is defined as “earnings before interest and taxes divided by capital employed, which typically represents total assets less a company’s current liabilities.”
After all this, it may also be prudent to look at comparable store sales. This means comparing a store’s sales during the same time periods of different operating years.
For instance, a retailer might look at a store’s fourth-quarter sales from 2017 and 2018 in order to gauge growth and make adjustments for 2019.
New stores may skew numbers, making a retailer look more profitable. By looking at comparable-store sales from locations that have been open for a year or more, however, one can glean just a little more information on how well a retailer is performing and if its new-store good luck will last.
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Becoming a retail investor isn’t for the faint of heart. It takes a lot of due diligence and time before an investor decides where to plunk down some cash.
It also takes an investor who isn’t afraid of a little volatility within a stock. Retail stocks can offer big wins for those willing to stick it out and can stomach the price swings that inevitably happen over the course of a year (holiday, back-to-school, and other major retail shopping times countered by periods of consumer inactivity).
All that said, investing in retail is easy enough for even novice investors. Each investor should choose a retail stock that feels like a good portfolio fit for themselves.
DepositPhotos.com
Like all investments, investing in a retail stock can come with risks. Retail stocks are highly tied to economic conditions. In a recession, non-essential purchases may be the first to go for many consumers and may cause an otherwise healthy retail store to sink.
Retail stocks are also often at risk of consolidation. It’s unquestionably a shrinking field, with larger players constantly buying or swallowing up smaller companies. This causes a rapidly changing landscape that must be monitored at all times.
Furthermore, retailers are often at the mercy of changing regulations. This could include rising minimum wages or regulation changes in a supply chain. All of these are things investors may want to take into consideration when assessing personal risk tolerance with any stocks.
As for when to buy retail stocks, that’s totally up to the individual investor. But the best time to buy will always be after all the homework is done and an investor feels confident in investing their cash. Timing the stock market doesn’t work in investors’ favor.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA/SIPC. The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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