Finding the Best Options Broker Online
When opening an option brokerage account, don't just go with the cheapest broker. You will find it worthwhile to spend some time evaluating their quality of service first. Read on for tips on how to find the best online options brokerage for your trading needs.
Full-Service Broker vs. Discount Broker
There are two main types of options brokerage firms in the market - the full service brokerage and the self-directed discount brokerage.
Full service or traditional brokerages provide a wide range of services at extra charges. Their services include advice to their clients on where to place their investment money.
Discount brokers are geared towards the self-directed trader. They do not provide any investment advice, leaving their clients to make their own financial decisions. Discount brokerages merely execute your orders and consequently their charges are much less than their full-service counterparts.
There are also brokerage companies that offer both services to their customers, letting them to choose the level of service they require.
Most option traders that I know opt to go with the discount brokerages since anyone who is confident enough to trade complex instruments such as options are usually financially savvy enough not to require trading advice from their brokers, especially when the broker's renumeration is based upon the frequency of trades rather than the quality of their recommendations.
Quality of Service
When determining which is the best options brokerage, commission charges should not be the only consideration. When it comes to online brokers, site availability, speed of execution and ease of use are just as important, if not more so, than price.
Availability & Speed of Execution
Site availability and responsiveness are perhaps the most crucial aspects to look out for when selecting an online brokerage. No matter how low the commission charges, if the trade does not get through because the brokerage site is overwhelmed by ultra high load and becomes unavailable, the amount of transaction fees you save is not going to be worth it.
Responsiveness of the site affects the timeliness of the real-time price quotes you get. Remember, we are living in the information age. News travel fast, round the globe, 24 hours a day. Markets react to breaking news events faster than ever before. You don't want to be lagging, even if its just seconds behind, especially when the trading action is fast and furious.
Note: Your own internet connection should also be up to speed. You should upgrade to a broadband connection if you are still using dial-up. If you are using wireless, check that your connectivity is good before connecting to the brokerage site.
Quality of Execution
The National Best Bid or Offer (NBBO) is an SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities. Look for brokers that guarantee trade execution prices that meet or exceed the NBBO.
Ease of Use
With option trades already complicated enough on their own, it sure doesn't help when you still have to puzzle over how to use the order placement form. An easy to understand user interface helps minimize errors, which can be extremely costly when thousands of dollars are changing hands every trade. Look for option trading brokerages that offer single-screen order entry forms for covered calls, condors, butterflies and other multi-legged option strategies.
Commissions and Fees
To differentiate themselves from their competition, options trading brokerages are very creative when charging commissions. For options trades, if you take a look at their commission and fees page, you should see two charges: 1) a per trade fee and 2) a per contract fee.
Per Trade Fee (or Ticket Charge) - There is usually a minimum fee per transaction, regardless of how many (or rather, how few) contracts are involved in each trade.
Per Contract Fee - This fee is charged for every option contract involved in each trade.
It is important to know how they are used to calculate the total commission costs per transaction. Usually, the following method is used:
Total Commission = $X per Trade + $Y Per Contract
But some brokerages use the following formula:
Total Commission = $X per Trade or $Y per Contract, whichever is higher
Market or Limit Order
Some companies charges different brokerage fees for different types of orders. You should note the fee for limit orders since you almost never place market orders.
Internet or Broker-assisted Trade
Broker assisted trades can cost as much as several times more than internet trades. The only reason to place a broker-assisted trade is when you are cut off from the internet and a very good trading opportunity happen to arise.
There are options brokerage houses which charge a lower rate if your trading frequency exceeds a certain threshold. So, if you are an active trader making dozens of trades a month, it makes sense to look out for a brokerage firm that offers such a discount scheme.
To offset their low commission charges, some discount brokerage firms charges a slew of hidden fees. So if an option brokerage charges an unusually low fee compared to the industry norms, make sure you find out whether there are other fees that you should be aware of. Some common hidden fees include:
- Account Inactivity Fee - Some brokerages charges a fee if you did not make any trade after a certain period of time.
- Annual Maintenance Fee - This is a fee levied every year as long as you have an account with the brokerage firm, whether or not you have made any trade.
- Minimum Balance Fee - This is a fee that is levied peroidically (say monthly or quarterly) when your account balance is below a certain threshold.
Commissions can have a significant impact to an option trader's overall profit or loss, especially if your trading capital limits you to prudently buy/sell only 1 or 2 contracts per trade or if you are just starting out and your win/loss ratio is 6:4 or lower. Finding a low-commissions options broker can boost trading profits by as much as 50%.
Recommended Options Brokerage
If you are new to option trading, we recommend you sign up with OptionsHouse. They provide quality trade execution, intuitive, user-friendly interface while maintaining low commission charges. optionshouse also provides a Virtual Trading Tool where beginners can try out options trading in real market conditions without risking real money.
Your new trading account is immediately funded with $5,000 of virtual money which you can use to test out your trading strategies using OptionHouse's virtual trading platform without risking hard-earned money.
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