Selecting an Options Trading Broker: Part 1
Selecting an Options Trading Broker: Part One
If you are interested in trading options, there are some essential items that will need to be taken care of before you can begin. First of all, you will need to open a trading account with one of the many options trading brokers vying for your business. This account will be necessary so that you can place trades with the broker who will then execute the trade on your behalf. However, choosing the best options broker can be a bit confusing, especially for someone new to this type of trading.
Points to Consider when Choosing an Options Broker
When choosing an options broker, it is important to consider much more than their commission fees. Factors such as site availability ease of use and speed of trade execution can all be very important, in fact, they might even be more important than the fees a broker charges.
When choosing an online brokerage firm, the availability and responsiveness of their website should be one of your primary concerns. A site that is down because it cannot handle the trading volume or one that is not fast enough to keep up with constant changes in the market can be a huge detriment in your ability to trade. This is especially true when breaking news creates shifts in the market where every second counts.
Of course, a website that is difficult to navigate will also be a big problem for the options trader. Each transaction can put large sums of money on the line; the ability to easily navigate the website and place an order as efficiently as possible will be an important factor in choosing the right options broker.
The easiest way to compare options trading brokers is to use side-by-side comparisons. Look at their pricing structure, including all fees, as well as how easy their site is to navigate and their site’s overall responsiveness. With a little comparative research, you will soon find the best options broker for your trading needs.
Full Service vs. Discount Broker
Options traders have two different types of brokerage firms to choose from, these include either the full service brokerage or a discount broker. A full-service broker offers a variety of services, such as providing advice on investments, but these services come at an additional cost to the trader. Discount options brokers will merely execute trades that are directed by their clients, so the fees involved are typically much less than the full-service brokerage.
Most options traders choose to use a discount broker because it is not only cheaper, but they generally have their own strategies and methods for picking the best place to put their investment dollars. After all, options traders who are knowledgeable enough to trade in options generally will not require investment advice from their broker.
Most options trading brokers base their commissions on a per trade and a per contract fee. There is typically a minimum fee per transaction, regardless of the number of contracts involved in the trade. The per contract fee is a charge based on the number of options contracts involved in the trade. In order to determine the total commission per transaction, you need to know how the broker calculates their rates. Typically, commissions will be based on the sum of these two fees; however, some brokerage firms will charge the higher of either the per contract or per trade fee.
There can also be additional fees for broker-assisted trades; these fees can be eliminated by placing your own orders online using the broker’s website. Additionally, some brokerages offer discounts for high-volume options traders. Each brokerage firm will have their own standards, but a predetermined number of monthly transactions will often result in discounted fees.
Understanding the fee structure of the brokerage firm you choose is an extremely important part of maximizing your investment profits. It is important to be aware of any hidden fees as these extra charges can quickly increase the cost of your trades and lower your profits. Some fees you will want to watch for include:
• Minimum Balance Fee
• Annual Maintenance Fee
• Inactive Account Fee
These hidden fees are often used to offset exceptionally low brokerage rates. When you find a broker who is offering rates well below industry standards, be sure you are aware of any hidden fees they may be charging. Commissions and fees can significantly impact your overall profits.