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How To Select The Best Options Broker


Selecting the right broker is one of the most important things for options traders. It becomes even more important if you are an active trader and trade hundreds or thousands contracts every month. Select the wrong broker - and your chances to make money are going down dramatically.

I would like to share some parameters of selecting the right broker, based on my personal experience and feedback from our trading community. You can also read our extensive Brokers and commissions discussion on our forum.

First, lets take a look at excellent Brokers Review published by Barrons. They do it every year, and it's worth to review the results and to read the brokers description.

In 2018, Interactive Brokers takes the top spot, dominating in range of offerings, portfolio analysis and reports, and costs categories.

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What is more important for us as options traders is the "Best for Options Traders" category. Interactive Brokers is #1 in this category as well.

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What makes IB the best overall broker?

You can read the Barrons article for details, but let me share my personal opinion.

I believe that there are three most important factors when selecting the options broker:

Cost

Lets assume that you buy a straddle for $2 ($1 each option). With IB you will pay 0.70 per contract. To do a round trip trade is $2.80. This is 1.4% of the cost of the trade. So if my gain is 10%, then I keep 8.6% after commissions.

If you pay $1.5 per contract, then your total cost is $6. That's 3%. You need 3% gain just to break even.

Over time, this is HUGE. Commissions are probably the single most important factor if you are an active trader.

Some brokers also charge a fee per ticket. This is an account killer, especially for smaller accounts. If your broker charges a ticket fee, you need to change bro
kers immediately.

Here is an example from Etrade:

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Just to be clear, you will be paying $6.95 PER TRADE ($4.95 for more active traders) In addition to per contract fee. So if you trade for example one straddle, it will cost you (as an active trader) $11.90 for a round trip trade, compared to ~$3 with IB.

TD Ameritrade is even worse:

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I'm sorry, but this is a robbery. Those brokers simply don't deserve your business.


IB used to be the cheapest broker, but there are few other excellent options today in terms of cost.

SteadyOptions members might consider Tradier Brokerage Special Offer. Tradier offers a special $40/Month of Flat Price Trading for SteadyOptions Clients. For $40/month the SteadyOptions client can trade unlimited options trades and there will be no per trade commissions. Please review the link for details.

tastyworks is also an excellent option, especially for larger accounts. They charge $1.00 per contract for opening trades, $0.00 for closing trades (so just slightly cheaper than IB), but they also capped the commissions to $10 per leg. For larger accounts, this means huge savings.

Execution

What's the point to have low commissions if your execution sucks?

Well, IB has one of the best executions in the industry, thanks to its "Smart Routing":

  • Unlike smart routers from other online brokers, IB SmartRouting never routes and forgets about your order. It continuously evaluates fast changing market conditions and dynamically re-routes all or parts of your order seeking to achieve optimal execution and maximize your rebate.
  • IB SmartRouting represents each leg of a spread order independently and submits each leg at the best possible venue.

From my experience, and based on members feedback, this algorithm does indeed provide an advantage compared to most other brokers. However, members who used Tradier and tastyworks also reported pretty good results.

Platform

Having a good and intuitive platform is the third factor that you should consider.

It should be stable, intuitive and offer fast way to place trades. IB platform requires some learning curve, and some users consider it outdated, but personally, I like it. I might be biased as I have been using for over 10 years now, but I believe the learning curve is well worth it.

Many users praise TD Ameritrade (thinkorswim) platform for its expensive features, but their current commissions structure makes it terrible for active options traders. Unless you were grandfathered at their older rates, or can negotiate commissions under $1.00/contract with no ticket fee, I would avoid them.

Other Considerations

There are some other things that you should consider, such as:

  • How is the Customer service? Unfortunately, IB has one of the worst customer services in the industry. Don't expect any hand holding, and don't expect any help in case you have some trading issue. Their philosophy is "our algorithm is always right, obviously you (the customer) did something wrong." 
  • Does the broker charge extra for real time data and how much?
  • How about assignment fee and exercise fee? IB charges ZERO for both, while some other brokers charge $15-20.
  • What are the margin rates? IB has the lowest margin rates in the industry.
  • What happens in case of margin call? IB has the strictest rules regarding margin rules. When you get a margin call (in case of assignment for example), they might liquidate your positions within minutes. It's an automated process, nothing you can do about it, so try not to get a margin call with IB.
  • What about Global Markets? IB is rated #1 by Stockbrokers.com in the Best for International Traders category. It offers very wide range of international markets and products, and also accepts clients from all around the Globe. Many other brokers have limited exposure in terms of countries they accept clients from. 

Conclusion

In this article, I tried to offer some personal perspective on selecting an options broker. In my opinion, Interactive Brokers, tastyworks and Tradier offer the best combination of cost, execution and platform. 

That doesn't mean there are no other good brokers. This conclusion is based on my personal experience and feedback from hundreds of members.
 

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The reason I asked is that you had said that tastyworks was slightly more expensive than IB. It would seem that IB, rather, is somewhat more expensive than tastyworks based on the base commissions (1.40 roundtrip for IB & 1.00 for tastyworks).

 

Edited by Alan

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3 minutes ago, Alan said:

The reason I asked is that you had said that tastyworks was slightly more expensive than IB. It would seem that IB, rather, is somewhat more expensive than tastyworks based on the base commissions (1.40 roundtrip for IB & 1.00 for tastyworks).

 

You are correct, good catch!

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Here is one of our members perspective that summarises things nicely:

 

 

Quote

 

Well, E-trade option commissions are absurd.

I have an etrade account, but I dont trade any options there.

Ticket fees are a deal breaker for me. I leg into and out of many trades and that just doesn't work with a ticket fee.

@Kim has mentioned in other posts that some members have negotiated lower commissions at some brokers and I think that is ridiculous. I mean, if you have to stay at a particular broker, sure get the lowest commissions you can, but the whole negotiation deal just leaves a bad taste in my mouth.

For me, Tradier has been a great deal. I am on the 40.00 month flat fee REGARDLESS of volume. I do pay an additional fee for TradeHawk (49.00) as Tradier doesnt really have a usable web interface for trading and monitoring spreads. (That's what ONE is for). But in my opinion it really is a great deal. If I want to trade smaller allocations or 1 lots I do it in Tradier with out having to worry about commissions at all. That's hard to beat.

I also trade with IB. Commissions are very reasonable for options and stocks, and they do not charge for for exercising an option, I like that.

With IB though you have to be careful as it is my understanding that they do NOT do margin calls. They just liquidate positions in your account to bring the balances back into margin parameters. When you are trading short options in a smaller account, it does not take much to hit margin call territory if one of your short positions gets exercised. With IB, you have until 9:40 the next trading day to get your account back into margin safety or they will do it for you.And after a couple of conversations with them they make it pretty clear that they may or may not liquidate the 'relevant' positions. All I am saying is I keep a close eye on my IB account.

That's my now I guess 5 cents worth.

Others will have their own opinions...

 

 

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