In a move that’s akin to looking in a mirror with a mirror behind you… I am convinced that a long-term option on optionsXpress could pay off nicely for you during the next 12 to 18 months.

Headline of the week:

“Lehman’s secret talks to sell 50% stake stall”

Ah, memo to Financial Times copydesk. If you are writing “secret” in a headline, it probably isn’t anymore.

LEAPing Lizards

Not too long ago, options were considered a crazy investment strategy for individual investors.

Back then, Wall Street’s brokerages and banks counseled their clients that options were complicated and risky, all while the very same brokerages and banks made billions trading stock options.

During those dark days of misinformation, even scholars such as Allen M. Poteshman and Vitaly Serbin dedicated time and effort to studying the bad things that happen to individuals who trade options.

In a Feb. 2003 Journal of Finance article, “Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options,” Poteshman and Serbin wrote: “Customers of discount brokers and customers of full-service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior.”

Of course, now, the average individual investor’s perception of options has changed dramatically for the positive. Much of that is due to people like my wife Lynn.

Lynn founded an options trading service in the late 1990s, way before most investors ever really considered options.

Not only was Lynn’s service eminently reputable, it was immediately profitable… as the founder of The Optionist, Lynn’s stature in the options community has only increased over the years.

That’s why, today, so many investors agree that with guidance from a proper expert, options can infuse sagging portfolios with a stiff shot of vim and vigor.

The vanguards of options trading, like Lynn, are also responsible for another interesting phenomenon – the formation of specialty options brokerages, also known as auto traders, of which the majority of customers are retail investors.

These are brokerages that receive trading alerts and automatically make trades for individual investors. These trades are for pre-set position sizes… such as for a set dollar amount or for a set number of options contracts on each trade.

Even cooler, one of these companies, optionsXpress is publicly traded on the NASDAQ under the symbol OXPS.

In a move that’s akin to looking in a mirror with a mirror behind you… I am convinced that a long-term option on optionsXpress could pay off nicely for you during the next 12 to 18 months.

The long-term options are known as LEAPS, which is an acronym for Long-Term Equity Anticipation Securities.

They are options contracts with expiration dates that are longer than one year. Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to prolonged price changes without needing to use a combination of shorter-term option contracts.

The premiums for LEAPS are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move and for the investor to make a healthy profit.

Ultimately, LEAPS are an excellent way for a longer-term trader to gain exposure to a prolonged trend in a given security without having to roll several short-term contracts together.

The ability to buy a call or put option that expires one or two years in the future is alluring because you can profit on a long-term price movement for a small sum without the need to invest a large amount of capital that would be required to own the underlying asset (the stock) outright.

So, why do I want you to grab LEAPS on an options brokerage – an auto trader? It’s for the same reason anyone goes long. optionsXpress is a helluva business.

Led by CEO David Fisher and founder Ned Bennett, it has a brilliant management team.

Because of this, optionXpress sports a 40% profit margin, it has no debt so its return on equity of 42% is, well, out-freekin-rageous, and optionsXpress’ return on assets of 10% is sweet, too.

But, let’s get back to Lynn and the one or two other visionaries who led investors to options back in the1990s… and made options mainstream today.

You see, OXPS has been a prime beneficiary of all that increased retail investor activity. In fact, overall volumes for US listed options have grown at an impressive pace over the past 10 years – even outpacing the growth in equity volumes. According to the Options Clearing Corporation, total option trading volume grew at a 10-year compound annual growth rate of 25% through the end of 2007. Just as impressive is the recent trend that saw 38% average growth for 2006 and 2007.

That volume should continue to grow over the coming years as trading costs continue to decline and retail investors become more educated.

On top of that, OXPS holds some key competitive advantages with its technology platform, low overhead, focused customer service, and order execution capabilities. And, with no physical branch offices, a mainly variable cost structure, and low customer acquisition costs, OXPS has been able to deliver pretax margins that are well ahead of other brokers, while still growing its account base.

Nice, huh? It makes OXPS sound like a solid investment. And if straight ahead is the way you want to play this you’ll like the fact that optionsXpress’ current dividend yield sits at around 1.6%.

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