Trading is all the rage these days, and though we here at 24/7 Trader would like to take some small measure of credit for its burgeoning popularity; we know there are probably bigger reasons why buying and selling stocks and options have become so popular. Just how popular has trading become? To answer that all we have to do is check out today’s earnings release from stock-options trading exchange CBOE Holdings Inc. (NASDAQ:CBOE).
The granddaddy of U.S. trading venues reported robust first-quarter earnings which spiked in large part due to a surge in stock-index options trades. During Q1, the company said net income traded up to $41.8 million, or 50 cents per adjusted share. That’s a big increase from the $32.9 million, or 37 cents a share, it earned during the same period last year. That number also was solidly above Wall Street’s consensus estimate for EPS of just 47 cents.
After reading the CBOE’s earnings report, the big takeaway for me was the revenue generated by the CBOE’s proprietary products, including futures and options on the CBOE Volatility Index, otherwise known as the VIX, and the S&P 500. During Q1, trading in CBOE index options was up 28% year-over-year to about 1.5 million per day on average, and that helped the company generate a boost in fees collected on CBOE products from each trade to 37.8 cents from 28 cents in Q1 a year ago.
Click to EnlargeThe numbers clearly demonstrate the success of the CBOE’s proprietary products, as these trading vehicles have become a favorite way to bet on the direction of the markets—not just for retail investors, but also for institutional traders—and hence the enhanced profit for the exchange.
Let’s keep this thesis simple here: if the popularity of trading these markets continues, and there is no reason to think otherwise, then the CBOE is going to keep generating strong revenue and strong earnings. For traders, that means buying CBOE shares here could be a very lucrative momentum play. Think of it as a way to pay yourself via buying the stock that profits when others bet on the market.
I suspect getting in on CBOE shares here after these solid earnings could net you another 10-15% in upside over the next few months.
At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.