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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. 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. 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 brokers immediately. Here is an example from Etrade: 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: 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. Additional reading: Brokers And Commissions Trading and getting fills with Interactive Brokers Executing Orders in Interactive Brokers Tradier Brokerage Special Offer Tastyworks A New Brokerage Firm eOption Brokerage Special Offer
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. http://online.barrons.com/articles/SB50001424053111904628504579433251867361162
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? Their conclusions: 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." Their conclusion: "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.
Options Trading is a business. As in any business, there are costs. One of the major costs is commissions that we pay to our broker (other costs are slippage, market data etc.) While commissions is a cost of doing business, we have to do everything we can to minimize that cost. This is especially true if you are an active trader. 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): Click here to view the article