Choosing the right brokerage is an important first step in trading. When you are an option trader extra special attention needs to be paid to your brokerage selection. With options the trades can become quite complex and quite expensive, so finding a broker that can cater to your needs is a must. A bad broker can put you in a position to lose instead of setting you up for success by stacking the odds against you. As we've been in the game for many years we've had our experiences with the good and the bad.
Our journey started us off with the cheapest broker we could find that was a mistake and we have now progressed to finding a broker that now assists us with our trades. Brokerage selection should never rely on one metric but a multitude of metrics for the best overall experience. Below we will list the 5 top brokerages for option trading, their pros and their cons. For over 40 years TD Ameritrade has been in the brokerage business, albeit a very different company back when it first started.
It has since undergone name changes, acquisitions and expansions to become the brokerage that stands before us today. For us option traders TD Ameritrade has several very unique tools in its arsenal. Their acquisition of ThinkofSwim gave us a set of tools that rivals no one. Option Chain Most brokerages display a very limited option chain, but TD Ameritrade gives you extensive options to choose from along with the ability to customize and code your own filters.
With their system you can quickly and easy view all strikes for all expiration dates. This is extremely handy if you want to compare or trade over multiple expiration dates. Fill your option chain with not only all the greeks but also probabilities and return factors. It allows you to add trades to simulation so you can better understand how a strategy will work before it is even placed. You can combine multiple puts, calls, and stock to see what the trade looks like and how it will act under different conditions.
Once you have a simulation set up you can adjust the underlying price, volatility and time to expiration to learn about your profit, loss, greeks and probabilities of the plays. If you already have a position on you can view it through the analyze tab and add adjustments to see how they will affect your current position and what to expect in various market conditions.
An intimate understanding of the analyze tab is a must for option traders. Reliability and Customer Service Reliability should be a major factor in your consideration for brokerages.
What tends to happen is that cheaper brokerages will lose service during high volume days. If there is a major down day and large volume is hitting the markets you do not want your brokerage to fail you and not allow you to trade. This is when you will need them up and online the most. TD Ameritrade is extremely reliable with its services. They may have one outage every five years and even then it is not an inconvenience.
We have noticed, although not in recent years, that some sections will fail in their software such as their charting program, but the overall platform and ability to trade still remains active. Customer service is another big factor when selecting a brokerage.
If you need any help TD Ameritrade is able to assist quickly and easily. You have the ability to email, call or live chat them for your customer service needs. We typically choose to live chat them through the platform and they resolve our issues in the matter of minutes.
We have called them and can usually connect to a representative almost instantly. Email support usually takes up to 24 hours to return a response. Its trading platform, ThinkorSwim, is extensive by itself and that is only one tool that they offer. For a new trader TD Ameritrade will overwhelm and it could cause trading errors due to lack of experience with the platform. The positive spin we can place on this is that TD Ameritrade does allow for paper money trade, otherwise known as a fake account.
This will give you plenty of opportunity to learn the platform without making the mistakes in real-time with real money. Commissions TD Ameritrade may offer some of the best tools on the market but they certainly charge you for them.
Their commission structures is one of the highest on the market. If you are trading a small account size commissions need to be a major factor in your decision. Tip Option commissions are very negotiable throughout brokerages. Once you begin to trade with TD Ameritrade and develop a track record you can begin to talk them lower is their commission prices. First begin by asking them to lower or remove the base charge for options.
This will remove the cost to just open an option position and allow you to just pay for each option contract. Once you get the base charged removed begin to work on them with the per contract charge. It will take awhile and you will need to trade regularly and with size before they will start to lower your commissions but stay on them and they will get it in line with the industry standards. Overall TD Ameritrade is our number 1 pick for an option trader's brokerage.
Their option trading tools and platforms are second to none. Unfortunately their high commissions will make it more difficult for smaller accounts to use their services, but if you are able to look past their commissions you will not find a better broker. Commissions The commission structure in OptionsHouse is one of the best and perhaps only second to Interactive Brokers. The low base fee and even lower per contract price makes this an ideal brokerage for new traders to get started. On top of affordable option trade prices optionshouse keeps a simple pay structure throughout their entire brokerage.
There is a noticeable lack of hidden fees that is a rarity in discount brokerages. It is a web based platform but it is fast, reliable and easy to use. Walking through an option trade is very intuitive in their platform. They also have a great option chain screen which will allow you to drill down to different sets of analysis.
When putting an option trade together you will be able to see your profit and loss graph, various risk metrics and a one click button to create the trade ticket. These screens will go the extra step to try and explain the difficult option terms and place them in laymen terms. Their screener is an interesting and entertaining data driven tool. Again, it takes something that can be very complicated and simplifies it for the new option traders. Now you can forecast a stock price and tell it the risk and profit you desire and it will generate the option strategies that fit those constraints.
Customer Service The one main drawback of OptionsHouse is their customer service, and unfortunately this one will rank towards the back of the pack. We found it difficult to get a reasonable response in a short amount of time. Most of the time we were rerouted on the phone before finding someone that could answer our questions. Overall we love the merger of OptionsHouse and TradeMonster. We've always been a fan of the TradeMonster option platform so it was a real treat to seem them keep this going forward.
For beginning option traders we extend our recommendation to OptionsHouse for your broker. Their low commissions and user friendly platform will make it easy to get in and stay in the game. Interactive Brokers has been around for almost 40 years and remains one of the top brokers for foreign accounts.
The members of Interactive Brokers are credited with brining handheld computers to the floor and thus revolutionizing trading as we know it. They have continued to dominate the markets in the amount of traders that place orders through their system. They have access to different markets in 30 different countries. Commissions Interactive Brokers has one of the lowest commission rates in the business but there are a few caveats. However, if you are not an active trader you will be hit with lots of hidden fees.
Otherwise you will be charged a minimum fee for inactivity, real-time quote fee and platform fee. Most traders shouldn't have trouble hitting the minimum in commissions if you are trading regularly or with any size. Platform In this day and age where applications are visually appealing and is built for the user the Interactive Broker platform takes a back seat.
The platform is built to handle a multitude of products and currencies so in that department it excels however there is a learning curve. The platform has the appearance of an advanced excel spreadsheet where everything is laid out in rows and columns. Initial Investment The initial investment alone lets you know that this is not a brokerage for new traders.
Both of these amounts are far and above every other discount brokerage. Interactive Brokers is a great brokerage for seasoned traders.
We would warn against new traders starting with Interactive Brokers unless you have a foreign account. The learning curve in the platform and the hidden fee structure would make it difficult for a new trader to come out ahead. For seasoned traders looking for the smallest commission structure and not a lot of frills this is the brokerage for you. There is no limit to the order types, investment products or markets that you can participate in.
Thus far the brokerages remain independent of each other although we do not know for how long. Platform Their platform for option traders is probably one of their greatest assets. Their approach for entering trades is very intuitive which is great if you are a new option trader. Setting up complicated option structures is now easy to do by simply adding legs to your order ticket.
One of the neatest order types this platform has to offer is their "Walk Limit" order type. This order type will adjust your limit order to find favorable prices on the market. You can set your minimum limit number, as you normally would, and it could find you a better price without you having to adjust the limit yourself.
This is a very neat order type especially if you trade a lot of short options. Their option analysis tools are also top notch. OptionsXpress will show you easy to read and easy to use profit and loss charts and probability analysis for your option trades.
Much like OptionsHouse you can also search for possible option plays by telling it what you expect out of the underlying along with your profit targets and risk metrics. Commissions OptionsXpress has a competitive option commission structure but there are a few hidden fees to be aware of.More...