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If you are going to be doing options trades on a regular basis, it is important to be able to execute your trades in the most convenient and cost effective manner. Picking a brokerage firm that is truly options friendly will go a long way toward achieving that goal.
Sooner or later the time will come when you urgently need the assistance of a live broker. Almost all brokerage firms provide a phone number to connect you with some kind of live assistance, but the quality of that assistance varies dramatically from one firm to another.
The first issue is how quickly you can get through to live assistance. Being on hold for ten minutes could be very costly when trying to resolve a sensitive trade problem.
The second issue is the competence level of the person who takes your call.
Many brokerage firms have a severely limited staff of people who are thoroughly familiar with options trades. When you need help with an options trade, you want someone on the line who understands your problem. Good brokers provide you with direct access to a team of brokers who specialize in help with options trades.
In principle, the options specialty brokers should be the best at providing competent assistance. While this is true for many of them, there are some whose access to a live broker is restricted.
Margin requirements vary markedly from one brokerage firm to another. Also, there are wide variations among brokers as to the types of allowed options trades, particularly in retirement accounts.
The most restrictive brokers require margin that corresponds to the worst case scenario for every option in your account, regardless of other options in the account that assure a hedged position. The most liberal brokers only require margin on short option positions to the extent that they are not appropriately hedged.
An easy way to get an overall sense of a broker’s policy on margin requirements is to inquire if they require margin on butterfly trades. It doesn’t matter whether or not you plan to do butterfly trades. The answer to this one question will provide a good gauge of the broker’s policy on margin. The more restrictive brokers do require margin on butterflies, while the most liberal brokers do not.
In most cases, the options trading restrictions imposed by a broker is related to their policy on margin. This connection becomes quite apparent in retirement accounts. The most restrictive brokers forbid all spread trades in retirement accounts, as well as any option trade that might require margin. The most liberal brokers will allow almost any option trade for which there is sufficient cash in the account to close the trade if necessary.
BROKER SELECTION: To enhance your success at trading options, it is important that you give careful consideration to your choice of a brokerage firm. If you were only going to trade stocks, there are plenty of brokers whose services are adequate. To trade options, you must be more selective in picking a broker.
All brokers claim that they are “options friendly”, but you will need to examine their services closely to see if this claim is justified. The goal here is to outline elements of broker services that are most important to options trading.
When you do your own trades online, you definitely want a high quality trading platform. This is essential to getting good entry and exit prices for your options trades.
Most brokers will offer you some kind of free trial examination of their trading platform. You should take advantage of such an offer to see if a particular platform seems options friendly.
The most important feature is that you have real time stock and option quotes. In today’s market, things move way too fast for you to be making decisions that are based on delayed quotes.
Your platform should provide a convenient means to view option chains, where you can quickly and easily identify the various strike prices and expiration months. Good platforms also show you the volume and open interest numbers for each option. The best platforms additionally provide deltas and implied volatilities for each option.
A good platform allows you to trade directly from the option chain. You can simply highlight the option of interest and bring up a window to execute the trade. The best platforms also show you the bid/ask prices at each options exchange and allow you to direct your trade to the exchange of your choice.
Good platforms provide stock charting on several time frames including daily and one-minute intervals. These platforms also offer a variety of tools (moving averages, stochastic oscillators, etc) that can be added to the charts. The best platforms allow you to simultaneously view several charts with different time frames. Being able to follow minute-by-minute stock movement can be very helpful in selecting entry and exit points for your options trades.
Most brokers do not charge for the use of their trading platform, provided that you do a sufficient number of trades per month. If your trading activity falls below the required level, there is a nominal monthly charge.
The best platforms for options trades allow you to enter multi-leg trades as a single entry. There are also a few brokers with platforms that allow contingent option orders, whereby an option trade can be triggered by the price action in the underlying stock.
If you are going to trade options on a regular basis, you should be concerned about commissions. Since commissions on options trades are always higher than on similar stock trades, it is worthwhile to pick a broker that offers a reasonable rate.
With some full service brokers, the commissions are so expensive that your potential to make a profit is significantly diminished. Until recently, even the so-called discount brokers were charging relatively high commissions on options trades. Fortunately, this is changing as several of the big-name discount brokers have reduced their commissions in order to be more competitive with the options specialty firms.
Nowadays, there is no need to use a broker that is charging more than $1.25 per contract along with a ticket charge of $10 or more. Some of the top-notch discount brokers, who offer almost as many benefits as the full service brokers, have reduced their commission rates to $1.00 or less per contract along with a $10 ticket charge.
Essentially all of the options specialty brokers charge $1.00 or less per contract with a ticket charge of $5. Some are now applying only one ticket charge for a multi-leg options trade. This is a great savings for those that do a lot of spread trading.
All brokerage firms charge more for phone orders handled by one of the brokers on their staff. It is very worthwhile to get the lower commission rate by learning to place your options trades online. With a little practice, you will soon be better at initiating options trades than any of the broker staff.
For purposes of this discussion, we will refer to three types of brokers: (i) Full Service, (ii) Discount and (iii) Options Specialty.
While your broker should address all of your investment needs, you need to check that their options service is suitable for your purposes. You don’t necessarily need an options specialty broker, but you should review the various items discussed below to make sure that your broker is truly “options friendly”.