Dealing with a reliable and diligent broker is an important element contributing toward trading options successfully. Trading options involves considerably more sophistication than trading stocks, both in the broker’s trading tools and platform, as well as in their customer support staff and how much they know about options and options trading.
Discount brokers do not generally offer trading advice or research, so if you want those benefits, you might consider paying more for a full-service broker instead. Most traders sophisticated enough to trade options, generally prefer discount brokers, since many options traders typically do their own research.
What to Look For in a Discount Options Broker
Finding the broker which charges the lowest rate may not always be the ideal situation for many traders. Other factors that affect trading and could cost the trader money in the long run are the quality of a broker’s execution, and the ease of using the broker’s trading platform.
Options and equity brokers in the United States are held to an SEC requirement called the “National Best Bid or Offer” or NBBO. The regulation requires the broker to give the customer the best bid or offer price immediately available upon receiving a market order. Look to open an account with a broker who guarantees that their executions meet or exceed the NBBO requirements.
Options trading involves more than just buying and selling a single stock, with a myriad of spread combinations and other complicated strategies available to more sophisticated traders. The broker’s trading platform should be easy to understand and navigate, with all of the relevant options pricing information you require.
The broker’s platform should also have standardized single screen order entry forms for strategies such as buy-writes, horizontal and vertical spreads, butterflies, condors and other popular option strategy combinations.
Most discount options brokers charge a flat fee, plus a per contract fee for options trades. The flat fee for most discount options brokers is between $4.95 and $12.99 per trade, with per contract charges of between $0.50 and $0.95 per contract.
Some discount options brokers offer a flat rate on all trades. An example is OptionsHouse that charges a flat rate of $9.95 per trade regardless of the number of contracts. Many brokerages also offer customers attractive incentives to open accounts. For example, Ameritrade TD’s ThinkorSwim.com online options brokerage offers new traders commission free trading for 60 days after opening an account with just $2,000.
In addition, ThinkorSwim.com also offers an additional incentive when opening an account by giving traders cash bonuses of up to $600 depending on the amount the account is funded with. Commissions can add up considerably for active options traders, which is why finding a broker that charges a low rate without compromising their customer service is very important.
Some discount brokers offer other interesting services in addition to options execution. For example, ETrade.com offers their customers an FDIC insured savings account when opening a trading account. They also provide their clients with an ATM/Credit Card for the savings account, which might be interesting for some traders.
Another consideration regarding opening a discount options trading account is what other brokerage services and markets the broker offers. In addition to equities, some brokers will offer trading in bonds, mutual funds, exchange traded funds or ETFs, treasuries, certificates of deposit, commodities and foreign exchange.
Basically, finding the best discount options broker involves first knowing what you require for your options trading business, and then researching which broker is best able to satisfy your needs for the most attractive price.