I want to talk today about commissions.
Lets assume that you buy a straddle for $2 ($1 each option). I have an account with IB (Interactive Brokers) and pay 0.70 per contract. So for me 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.
Some brokers charge you per ticket fee plus per contract fee. This might be a good deal if you do a lot of contracts. For example, if you do 20 contracts and pay $5 per ticket plus 0.30 per contract, then you pay 0.55 per contract. But if you do just 2 contracts, then it's 2.80 per contract.
Also some brokers charge a fee per ticket per leg, others per ticket for the whole spread. For RIC which is 4 leg trade, it's a huge difference. Since you make it as one trade, you might pay one per ticket fee with some brokers or four fees with others.
Commissions is one of the reasons why I don't like cheap stocks. A straddle on a $100 stock might cost around $5.00-6.00. Paying $2.80 commissions is only 0.5% of the trade. But straddle on $15 stock can be only $0.70, so $2.80 is 4% of the trade. A huge difference.
When choosing a broker for those strategies, remember that commissions can make a huge difference. Check the fine print and do the math which broker is better for you based on the number of contracts you are going to trade.
Update: For those who don't want to read the whole thread, it seems like most members really like IB. Barrons's agrees:
Based on Barron's numerical calculations, Interactive Brokers (interactivebrokers.com) claims the No. 1 spot overall for the third-straight year.
By Crazy ayzo
I'm looking for someone that is a power user of some of the following... Tradehawk with Tradier, Interactive Brokers, Optionnetexplorer ONE, CMLviz TradeMachine... and any other tools that you find particularly useful. My schedule is fairly flexible. I'm in the pacific time zone.
If this is something that interests you either post here or PM me with an hourly rate. It's ok if you only know some of the tools, I don't expect anyone to know them all. I can pay via paypal.
After I get a better handle on the tools, I'd also be interest in working with someone on strategy of non-directional trades.
P.S. I did get Kim's approval before making such an off-topic post.
The impact of commissions on your results can be astonishing.
This excellent article by Business Insider is asking the right questions (and also answering some of them):
When you pay commission fees for online stock trades, where does that money go? Do you get better execution by paying $9.99 to TD Ameritrade than by paying $1 to Interactive Brokers? How much better? Enough to justify the difference in price?
At least 17 million investors overpaying for online brokerage Only 12% of commission fee is used for trade execution at top brokerages Over $1.8 billion per year wasted on unused premium services Lets analyze one specific month, January 2015, and see how different commissions structure can impact the returns of our SteadyOptions model portfolio.
SteadyOptions $10k model portfolio traded 228 contracts in January. If you paid $0.75/contract with no ticket fee, you spent $171 on commissions, which is 1.7% of your portfolio value. While not cheap, but considering the fact that we produced 20.7% ROI in January (12.4% return on the whole account assuming 10% allocation), it is completely reasonable.
However, if you had a ticket fee of $8, in addition to $0.75/contract, you would pay $427 in commissions, more than double. In this case, your returns will be reduced by 4.3%.
This will make HUGE difference in the long term. To see how huge, I went to pro-trading-profits.com, a third party website that tracks performance of 400+ newsletters. I clicked on SteadyOptions performance report and played with different parameters. Using the $0.75/contract with no ticket fee, a $10,000 portfolio would produce $35,693 gains since inception. Adding $8 ticket fee to each trade would reduce the gains to $23,869.
The impact of the ticket fee is especially significant if you have relatively small account.
Of course commissions is only part of the whole package. Other factors include tools, platform, customer service etc. Barron's publishes a comprehensive brokers review every year. Here is the last one. Interactive Brokers (IB) was ranked #1 by Barron's third year in a row. This is the broker I personally have been using for the last 7 years and I'm very happy.
Barron's mention that "IB offers a lot more support to new clients, including individuals, especially those with larger accounts. Yes, using the word "support" in the same sentence as Interactive Brokers (without the modifier "dismal") is a change for us, but the firm has clearly made this a point of focus."
"Interactive Brokers continues to have extremely competitive pricing, and the lowest margin fees of any broker in our survey. You may incur some data fees, but the firm takes care of any options-exercise costs, which can generate unexpected fees at many other brokers."
On the open section of our forum, we have couple very useful discussions about brokers:
Brokers and commissions
Interactive Brokers tips, tricks, webtrader etc.
There is a consensus among our members that IB and TOS by TD Ameritrade offer the best combination of commissions, platform, and execution. If you decide to go with TOS, I highly recommend that you negotiate a commissions structure that does not include a ticket fee.
Here are couple more good articles worth reading:
The Truth Behind Broker Commissions - Learning Markets
Comparison of online brokerages in the United States
Relative Importance Of Options Brokerage Fees
For Canadian traders, here is an excellent study on the commissions schemas offered by Canadian discount Brokers.
I tried to to buy 1 Apr SPX 1300 put and getting an error message that I have insufficient margin. The message indicates that the margin will increase by 53,985 (see attached image).
I opened a ticket with IB. Their response was:
I couldn't believe this, but the fact remains.
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