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