How a Low Commission Broker Can Increase Option Spreads Profits by 50% or more

Many options traders tend to overlook the effect of commission charges on their overall profit or loss. It's easy to neglect the lowly $15 commission fee when every profitable trade nets you $500 or more. Hey, it's only 3% right?

Let's find out the answer by taking a look at a simple example using bull call spreads.

Suppose you make 10 bull call spread trades, where each trade has a maximum profit of $500 and a maximum loss of $500. Let's say you are a decent trader using a trading system with a win rate of 60%. This means that for every 10 trades you make, 6 are winners while 4 are losers. For simplicity's sake, let's assume that you win or lose the maximum amount for each trade. So, for the 10 trades, your overall profit is ($500 x 6) - ($500 x 4) = $3000 - $2000 = $1000.

Now, when it comes to calculating your trading cost, EVERY SINGLE ONE of your 10 trades will incur commission charges.

Let's say you are using an options broker that charges you a minimum of $15 per leg per trade.

At $15 per leg, entering each of 2-legged bull call spread will require $30. Total commission charges for entering all 10 trades will be $300. That's not all. Don't forget that the profitable bull call spreads will require closing transactions in which you will need to buy/sell-to-close both the call option positions. With 6 profitable trades, that means another $180 in transaction fees. Hence, your total trading cost is $300 + $180 = $480!

That takes away a whopping 48% off your trading profit!

When you implement option strategies with even more legs such as condors and butterflies, the commission charges are even higher.

So, even if you are a skilled trader with a win rate of 70% or more, you are still better off finding a low- commission broker if you are still paying a minimum of $15 per trade. Today, there exist online options brokers that charge as little as $5 per trade while still providing excellent trade execution and user interface. Using the above example, you could have increased your profit from $520 to $840 - or 62%! - simply by switching to a low cost options broker.

Recommended Low-Commission Option Broker

Of the many low-cost options brokers out there, we recommend optionshouse as they offer the most excellent combination of cost and usability.

Exclusive Promotion! Open a new account at OptionsHouse.com and get 100 Commission-Free Trades! (Make sure you click thru the above link and quote the promo code 'FREE100' during sign-up)


Ready to Start Trading?

Open an account at OptionsHouse.com and get 100 commission-free trades + free virtual trading tool!

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.

Once you start trading for real, your first 100 trades will be commission-free! (Make sure you click thru the link below and quote the promo code '60FREE' during sign-up)

Click here to open a trading account at OptionsHouse.com now!

Continue Reading...

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results....[Read on...]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount....[Read on...]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®.... [Read on...]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date....[Read on...]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative....[Read on...]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date....[Read on...]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin....[Read on...]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading.... [Read on...]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator.... [Read on...]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa.... [Read on...]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks".... [Read on...]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow.... [Read on...]

From Around The Web



Follow Us on Facebook to Get Daily Strategies & Tips!



You May Also Like



Options Basics

Futures Basics

Bullish Strategies

Bearish Strategies

Neutral Strategies

Synthetic Positions

Options Arbitrage

Options Strategy Finder

Outlook on Underlying:


Profit Potential:


Loss Potential:


Credit/Debit:


No. Legs:





Home | About Us | Terms of Use | Disclaimer | Privacy Policy | Sitemap

Copyright 2016. TheOptionsGuide.com - All Rights Reserved.