- 1. TD Ameritrade
- Option Strategies Web App
- Top 5 Brokerages For Option Trading
- 2. OptionsHouse
- 3. Interactive Brokers
- A Robust Set of Tools for Evaluating and Trading Options
- 4. OptionsXpress
- Trading Configuration
- 5. TradeKing
- Interactive Brokers Tutorial- Options trading with IB
- Interactive brokers enable limited options trading
- OptionTrader for Option Trading
- Mobile Options
Choosing the right brokerage is an essential first step in trading. When you are an options trader, extra special attention needs to be paid to your brokerage selection. With options the trades can become quite complicated and quite expensive, so finding a broker that can cater to your needs is a must.
A lousy 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 options 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.
Option Strategies Web App
Their acquisition of ThinkofSwim gave us a set of tools that rivals no one.
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.
The analyze tab is the greatest feature TD Ameritrade has to offer option traders. 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.
Top 5 Brokerages For Option Trading
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 options 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.
Ease of Use
As you can already tell TD Ameritrade is no small matter. 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.
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.
If your position cost you $100 and the commission is $10 each way then you begin a trade 20% down. $10 to buy into the position and $10 to exit the position adds up very quickly and it can be difficult to recover from.
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 options 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 can look past their commissions, you will not find a better broker.
OptionsHouse decided to team up with tradeMonster in 2014, and the merger created a robust platform by taking the strengths of each company.
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.
One of the best things to come out of the OptionsHouse/TradeMonster merger was the pickup of the TradeMonster platform which is a great tool for option traders.
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 exciting 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 options strategies that fit those constraints.
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 number of traders that place orders through their system.
If you are trading out of the United States Interactive Brokers is your go-to brokerage.
They have access to 100 different markets in 30 different countries. They are regulated by the SEC, FINRA, NYSE, SFA, and multiple regulatory bodies making them one of the most regulated brokerages for foreign accounts.
Interactive Brokers has one of the lowest commission rates in the business but there are a few caveats.
For option traders you are looking at no base charge and $0.50 per contract which is an amazing commission structure that won't be beat. However, if you are not an active trader you will be hit with lots of hidden fees. You need to spend at least $30.00 in commissions to waive most of the 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.
In this day and age where applications are visually appealing and are 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.
The initial investment alone lets you know that this is not a brokerage for new traders.
Interactive Brokers requires a $10,000 initial investment and $100,000 for margin trading.
A Robust Set of Tools for Evaluating and Trading Options
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.
Charles Schwab acquired OptionsXpress in 2011.
Since then Charles Schwab has reported it will be integrating OptionsXpress into Charles Schwab and doing away with OptionsXpress altogether. Thus far the brokerages remain independent of each other although we do not know for how long.
Their platform for options traders is probably one of their most significant assets. Their approach for entering trades is very intuitive which is excellent if you are a new options trader. Setting up complicated option structures is now easy to do by merely 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 usually would, and it could find you a better price without you having to adjust the limit yourself. This is an elegant 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.
OptionsXpress has a competitive option commission structure but there are a few hidden fees to be aware of. They have no base fee which is nice but their per contract fee is $1.50 which is steep by industry standards. You have to trade at least 35 contracts per quarter or they begin to impose minimum charges which will raise your fees.
35 contracts is not an extreme number for 3 months but you do need to be semiactive throughout the entire quarter to reach that number. Trading only a fee contracts at the end of the quarter can become quite costly if you are not prepared.
As mentioned above, Charles Schwab will be shutting down OptionsXpress.
There is no definite timeline that has been laid out but the intentions seem to be clear. As a customer you will be integrated over into the Charles Schwab system and most likely will still be using the OptionXpress platform.
As a child of a brokerage merger we can tell you that the process is usually not seamless and not without its headaches. Brokerages are usually quick to fix everything and there is never a worry about the securities you are holding or your cash.
Overall we like OptionsXpress despite its unknown future. They have a great platform that would benefit a new options trader.
Just make sure you are semiactive in the options market to avoid the hidden fees. There will probably be a new learning curve when the merger with Charles Schwab is complete, but we don't see that as a reason to not try them out.
TradeKing is still fairly new to the brokerage business having only launched in 2005.
Don't let their newness scare you away because they have a lot to offer to option traders. Their goal has always been to have a low commission structure with high customer service.
TradeKing has always maintained a low commission structure, and it has become the primary draw for using them as a brokerage.
They do keep a base charge for their options trades, but at $4.95 it is one of the lowest in the business. Their per contract fee, $0.65, is in line with their competitors. One of the beautiful parts about TradeKing is that they offer low commissions without hidden fees which is a relief.
It has been our experience that TradeKing is willing to negotiate on their option commissions. Before you start your negotiating, make sure you are an active options trader on their platform and trading with some size.
TradeKing's support staff is second to none.
You can reach their staff through email, phone, or even the community forums.
Interactive Brokers Tutorial- Options trading with IB
After asking a question on the forums you will receive a response from a staff member within 24hours fully addressing and updating any problems there may be. There is a very good chance that you will receive a response from the CEO himself as he regularly monitors the community forums. For new option traders this is a good brokerage to get started on as you will always have a support staff.
System reliability has always been the Achilles' heel for TradeKing.
Interactive brokers enable limited options trading
During large market volume days their platform has been known to get overwhelmed and shutdown. Orders can still be placed on the phone but getting through in a timely manner can be quite difficult. One thing we've noticed is that they are improving their systems, but they are still far from perfect.
In the past TradeKing always made use of a web-based platform that was far from easy.
There was no easy way to enter an options trade, especially a complicated order.
OptionTrader for Option Trading
There would be multiple screens to have to navigate through to get the ticket correct.
Over the last few years, TradeKing has developed their Live platform which is making it easier to place trades and monitor your account. It is still not the best system to use and there have been bugs, but it does show TradeKing is determined to improve their platform and make a better user experience.
TradeKing is a great platform for new options traders.
Their low unhidden fees make it easy for traders with smaller accounts to learn and trade without being set back financially. These low fees will come at a cost regarding reliability and platform use so know there will be struggles, but TradeKing is making a strong effort to improve.
Deciding on a brokerage takes some time and research.
Figuring out what is important to you as an option trader should be your first priority.
Some brokerages are catered to new traders and some for more advanced traders and there are a few that meet the best of both worlds. What you shouldn't do is base your decision solely on commissions alone.
With option commissions a lot of brokerages have some leeway and will allow you to negotiate your rates. Remember you are not committed to one broker for life. We see a lot of traders remain with the same brokerage throughout their whole career even though their needs have changed.
Which broker do you use and why? Let us know in the comments...