After last week's
column on the commissions that brokers charge for options trading, readers wrote back praising other brokers that they used. This week, I look at the commissions and offerings of some of those brokers.
What About Ameritrade?
Several readers wondered why I hadn't mentioned
Ameritrade. "They are all around the best, in my opinion, and even better now that they have lowered their option commissions," writes accountant Dale Chick. True enough, in October, Ameritrade lowered its options commissions to $8 a trade, plus $1.75 for each contract. Add $5 for limit orders. Ameritrade's price-cutting perhaps will pressure other brokers to do the same.
Beyond lower commissions, Ameritrade offers another options attraction. The broker has constructed an easy-to-navigate order-entry system. There are screens for relatively simple options trades, such as buying or selling
calls. More advanced traders can elect to enter
stop orders or
stop limit orders.
Crash Course in Stop Orders
Quick review: Stop orders instruct your broker to buy or sell an option when it reaches a target price. However, once that target price is reached, the stop order effectively becomes a market order. Your trade is executed at whatever the current bid or ask price happens to be. And as equity traders know, that means you can get stuck if the market's moving rapidly. In contrast, when a stop limit order reaches the stop price, your broker automatically enters a limit order. This ensures that you either receive the limit price you specify or the trade doesn't take place. Stop limit orders are especially useful with options trading, where mega spreads of $1 are common. Getting inside that spread can save you several hundred dollars because options contracts trade in multiples of 100. For example, if you manage to pare 25 cents off the ask price, you would save $125 on five contracts. On the other hand, with options, any limit orders must be traded by market makers. That can cause a delay and reduce the chance the trade will go through. (Market orders for options normally execute automatically.) Bottom line: Use a stop order if you want to close an option position quickly. Use a stop limit order if you want to open a position and you don't have time to watch the prices. Either way, make sure whatever options broker you sign with offers both stop and stop limit orders. Not all of them do.
Another thing that's nice about Ameritrade's order-entry system is that it lets you enter complex options orders, like
straddles, on one screen. (For more on straddles, see
Chill Out on Datek!
One last thing about Ameritrade: You can be approved to trade uncovered -- or
naked -- options provided you have a $10,000 minimum account balance. Which brings up a letter from a reader named Felix, who wondered why I had mentioned
in my column last week: "Datek provides limited option trading ability. You can't do naked or complex options there. So why the positive press?"
That's fair criticism. As readers of last week's column will recall, Datek began offering options trading last month. But as Felix points out, so far they only let you do simple trades. Datek says customers will be able to put together more complex options trades later this year. That should make folks happy. When
compiled its most recent
broker survey earlier this fall, many readers said they were basically happy with Datek but wanted the ability to trade options.
Know Your Options Options
Felix's letter brings up a good point. Before you sign on with an options broker, decide what
of trades you want to make. Do you want to put together
butterfly spreads? Check out if a broker permits those kinds of trades, particularly if you have a tax-deferred account. The details are not always easy to find on the Web site itself, so you may have to call.
Also, check out a demo of the broker's order-entry systems. Just because you
do a trade, doesn't mean the order-entry system makes it easy for you. As I mentioned, Ameritrade lets you put together the two separate orders making up a straddle using a single screen. Brokers generally require you to execute a complex trade such as a straddle via separate, generic screens. And that can get confusing.
(A good book to get you thinking about options strategies is
Getting Started with Options
by Michael Thomsett. There are also excellent free resources at the
Chicago Board Options Exchange
Simplicity and handholding go a long way when it comes to options trading, as 25-year-old full-time options trader
mentioned in his email. That's why he likes
Charles Schwab. He writes:
You get assigned to a team of people who are options experts. You know their names. Now, if you are really trading options, you want execution and no messing around, and you don't worry too much about commissions. This is because a screw-up on a trade, where spreads are so steep, can easily mean more than commissions. Whenever I need to unload or buy big orders, like 500 contracts at 3 bucks, I call up the number, one of my team people answers, and it is business from the first second. We pick an exchange and if I need to change my bid three minutes later it is done in a second.
You need to maintain a $500,000 account balance to qualify for that kind of red carpet treatment at Schwab. If you're not quite that flush, check out
Wall St. Access. The brokerage lets you trade options via the Internet. But it also has option-trained brokers who can work orders for you. Either way, the commissions are fairly steep: $40, plus $1.50 to $2 a contract for broker-assisted options trades; $25, plus $1.50 to $2 a contract for Internet trades.
Finally, several readers emailed that they liked
eDreyfus.com. eDreyfus has "great options info on their Web page," writes Ken Morgan. "You can even sell
short puts and calls with approval through the Web site."
eDreyfus also provides options traders with a very clean order-entry screen. For example, you can elect to enter the stock symbol plus the strike price and expiration date in lieu of the lengthy options symbol that already incorporates this information. You have to place more complex options trades like straddles over the phone -- which may be a good thing for straddle newbies. But you receive the Internet-trading rates. eDreyfus recently lowered its base-rate commissions from $15 to $12, plus $1.75 per contract.
Is this a trend or what?
Mark Ingebretsen is editor-at-large with
Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to
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