This Brokerage Stock Is an AI Play That’s Hiding in Plain Sight

The mere mention of artificial intelligence, no matter how superficial its ties to a company, hypnotizes investors into a stock-buying frenzy that makes sharks devouring chum seem peaceful.

No one really knows if AI will really create anything profound, or if it is more proof of how corporate chieftains and their spin doctors constantly create narratives to entice investors to push their stock prices higher.

In fluid situations with indeterminate risk and reward, we are mindful of a lesson learned in the B.C. era—Before Computers, that is. A wise investor often counseled protégés to bet on the jockey if they were unsure of the horse. The lesson was that experienced executives know what to do to get the job done, regardless of the trend.

That brings us to Thomas Peterffy, founder of Interactive Brokers Group (ticker: IBKR), an electronic brokerage firm. He knows about investing, technology, and horses, and unlike some other corporate mandarins, he knows what it means to let one’s actions speak for themselves. His stock isn’t as widely followed as it should be, even though he is globally recognized as a brilliant trader and an architect of the modern securities markets.

Peterffy declined to reveal Interactive Brokers’ AI plans, if any, to Barron’s, which is intriguing. He has typically been one of the first to use technology to advance and democratize trading, which leads us to believe that he likely has plans to make AI available to his customers. Interactive Brokers might just be an AI stock without an AI multiple.

Do you believe the stock market’s range-bound tension is due for a violent resolution? Interactive Brokers potentially monetizes that idea, too. The company’s sophisticated clients will likely respond en masse to whatever happens, and that should boost the company’s profits.

With the stock at $93.99, aggressive investors could sell the December $90 put option and buy the December $100 call option. The risk reversal—selling a bearish put and buying a bullish call with a higher strike price but similar expiration—sets up investors to profit from rallies and to buy stock at lower prices. The position could recently be established at no cost. If the stock is at $105 at expiration, the call is worth $5.

The thesis, of course, could be wrong, and the stock could emerge as the financial equivalent of Palantir Technologies (PLTR), which has failed to live up to investors’ lofty expectations. If the stock sinks, investors must buy it at $90 or adjust the put to avoid assignment.

The December expiration provides time for the AI thesis to pollinate, or for Peterffy to reveal his plans. It would be incredible, for instance, if he unveiled a virtual-reality headset that allowed investors to surround themselves in an immersive financial experience of options, stocks, interest rates, news, and charts.

In the absence of such innovation, many market-moving events also will occur over the next few months.

Economic data critical to solving the inflation puzzle that holds back the economy, and helps keep stocks locked in a trading range, will be released. Federal Reserve officials can be relied upon to create intraday volatility by jabbering about interest rates and economic data. And Interactive Brokers should release an earnings report in the middle of October.

Supercomputers with generative AI might already know the outcome. But the jockey and his horse seem like reasonable wagers for anyone who still makes decisions the old-fashioned way.

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Originally Posted September 13, 2023 – This Brokerage Stock Is an AI Play That’s Hiding in Plain Sight

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.