Option Broker

What is an option broker and why do you need one? Most of the major online option broker / dealers are names you should already be familiar with – companies like TDAmeritrade, Etrade, Scottrade, and Schwab. Any of these standard investment brokerages are more than happy to sell you options contracts as well – for a price.

In most cases if you have graduated from the relatively small capital trading of binary options and are ready to make the jump to the big time with a standard option broker – here are a few things to consider.

A Standard Option Broker Charges Fees and Spreads – and They Can Add Up Quickly

1st: An option broker charges a commission on trades, and the more trades you make, the more fees you will pay in the form of commissions to your broker. Because the commissions can range from about $3.95 on up to $29.95 per contact, you need to keep your trade sizes relatively large. At $2000.00 per trade, a $3.00 commission comes out to less than two tenths of a percent of your investment. At $29.95 per trade, that same $2000 investment is trying to climb out of a 1.5% hole before you even start!

2nd: Bid / Ask spread. The second major difference between binary options (the little league) and standard options (the big leagues) is there is a spread between the price you BUY a contract from your option broker and the price you would SELL that contract back to your broker. This spread is another source of considerable drain on your investment results. Options contracts which are heavily traded will have a narrow spread (this is likely where you’ll want to play), and thus have a smaller leak of funds each time you buy and sell a contract. Still not sure what I mean?
 

OptionsHouse
Consider an option contract on Microsoft stock. You might be able to buy a call option on MSFT for about 3 cents more than you would get if you were selling it. In other words you could buy the contract for $1.05 lets say, but you would only be able to sell it (immediately) at $1.02, get it? If you were investing $2000 again, that 3 cent spread would represent a $60.00 (3%) loss (approximately) in terms of bid and ask spread which your trade would have to overcome in order to be profitable.

This is why it is critical to find an option broker with the absolute smallest commission. It’s hard enough to be fighting to overcome a 3% spread loss. To add potentially a 1.5% commission fee loss on top of it makes breaking even on your trade all that much harder.

A Few Names in the Discount Option Broker Space

Amongst the best discount brokers in the space you’ll find places like OptionsHouse, optionsXpress, and others known to specialize in this sort of higher risk / higher leverage trading activity. When you have limited trading capital, minimizing the commissions paid can go a long way toward keeping your trades profitable. Isn’t that what we all want from an option broker anyway?

For more information on options trading, including more info on option brokers, visit an options trading tutorial.

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