If you want to explore the world of options trading, know that without careful research and due diligence, it can be quite complicated. But if you partner with the right options broker, you can get a handle on the proper research, place your trades, make sound decisions, and track positions. Choosing the best options broker for you isn’t necessarily complicated, but you do have to be thorough. Also, you do have to know which qualities are most important to you in an options broker.
With so many choices out there, it helps to know in advance what’s most important to you.
What is Options Trading?
Trading options works a little differently from trading stock or mutual funds. An option is simply a contract between a buyer and a seller that concerns a particular stock or another investment vehicle. The option buyer has the opportunity to compel the seller to take whatever action is outlined in the contract within the period specified within the contract. For example, a buyer might exercise a call option on a stock, which would be the opportunity to buy a set number of shares at a given price within a specified period. Once the buyer exercises the option, the seller must sell the shares to the option buyer.
Inside the Strategy
The key to options strategies is that the buyer always has the opportunity to exercise the option, but never the obligation to do so. Therefore, the option buyer will only exercise an option when it makes sound financial sense to do so. That’s where the strategy of trading options comes into play. For example, when the call option allows a buyer to purchase shares for less than they trade for on the market, then resell at a profit, that’s a reasonable move. This example is different from trading in futures. Trading in futures involves entering into a futures contract which obligates both the buyer and the seller to fully execute the stipulations of the agreement within the specified period.
Also, to call options, options traders can enter into contracts that specify put options. Put options allow option buyers to sell shares of stock at a specific price, which can help protect against downturns in the overall market. Both options can also be combined for a more sophisticated strategy.
Using a reliable options brokerage can make a huge difference in what you’re able to earn through trading options. Brokers, particularly online brokers, are improving every day, and they can make a huge difference in making the process fast, efficient, and profitable for you.
The Two Main Types of Brokers
When you’re shopping for an options broker, you’ll see two distinct paths you can follow: the full-service brokerage firm or the discount brokerage firm. Full-service brokerage firms provide a full range of services. Such services include advising their clients how to invest their money (and they usually have the price tag to match). Many services are available at extra charges beyond your base rate, for example.
Discount brokers, on the other hand, do exactly what their name indicates. They offer platforms directed more toward self-guided investors, who often prefer to make their own decisions. Discount brokerage firms do not, in general, provide their clients with investment advice. Since they are essentially executing orders, they charge considerably less than their full-service counterparts.
Sometimes you can find a brokerage firm that offers the best of both worlds. That includes advice, and support when you need it, as well as the freedom to make your own investment choices when that better suits your needs.
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Qualities to Look for in an Options Broker
Here are some of the key attributes you should look for as you choose the best options broker:
Commitment to Customer Service
You want to work with an options broker who operates – always – with your best interests in mind. So, make sure to put their customer service ethics to the test as quickly as possible. For example, what kind of communication works best for you? Phone calls? Texts? Email? Video chat? How will your questions be answered after hours or on weekends? Is there a call center, for example?
These are all reasonable questions for you to ask any potential options brokerage in advance. Not only does this help you get information for a better decision, but it also allows you to test response time and method of communication before you sign on with anyone.
And while you want to believe that everything will go smoothly and correctly at all times, it doesn’t always work out that way. So, you want to make sure any broker you’re considering has an appropriate customer service structure in place to help you when you need assistance. For example, when there are technical difficulties with the trading platform or when something else goes wrong.
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You may be spending a lot of time on your chosen broker’s online trading platform. So, it’s worth testing out everything you can to make sure it’s a platform that makes you comfortable. Options trading is already a complicated enough puzzle. Thus, there’s no reason to further exacerbate that issue by adding complicated technology that isn’t user-friendly and can be confusing or frustrating to use. An easy-to-understand interface can save you from making mistakes. Such mistakes can turn out to be costly in the world of options trading.
There’s no one-size-fits-all approach to the right options trading platform, so you’re likely to see a little bit of everything during your search. Some might require proprietary software, for example, while others are web-based. Some may be mobile-friendly, while others require the use of a desktop computer. But the overall user experience should feel right for you so that you can be confident that you’re using it to your best advantage – and profit.
Some of the best trading tools offer a simulated trading platform that lets you experience what it would be like to use that particular platform. Try this out if you have the chance so that you get a full understanding of the platform’s functionality. It should be easy and relatively intuitive so that you have a seamless user experience.
Key Questions to Ask to Get the Best Options Broker
Here are some key questions to ask as you explore a potential broker’s trading platform:
- How easy is it to navigate? Can you find what you’re looking for quickly and easily, or do you have to hunt around? Does everything make sense?
- Does it allow you to do everything you want to do – like fill out a ticket to submit later or create notification alerts?
- Is there a platform fee charged by the broker?
- Does the mobile version provide everything you’ll need while on-the-go, or do you have to wait until you can access a desktop version?
- How reliable is the site? Does it work as intended every time? Does it crash often? How speedily can orders be addressed? You don’t want to be lagging from a technological standpoint when trading is fast and furious.
Minimum Deposit Requirements
This can especially be a concern for newer options traders, who might not want to start with a significant trading investment. Some brokers set extremely high minimum deposit amounts, which can be difficult for some to maintain. Just make sure to research minimum deposit requirements and know that they’re sustainable for you before signing up with any broker.
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Speed and Quality of Order Execution
If your chosen broker isn’t able to quickly and efficiently execute on orders placed, that can undoubtedly harm your ability to profit from options trading effectively. The best options trading brokers will not only efficiently perform on your orders, but they’ll also make sure to do so at the best price. An online trading site that loads too slowly or isn’t quick enough to toggle back and forth between pages can mean a lower profit. However, that’s if you’re unable to move quickly enough to keep up with the market.
How can this broker keep your personal data – and your money – safe and secure? This is now a day-to-day reality for anyone using online services, but finding out what you can about how information is stored, encrypted, and protected from hacking is essential. You have to feel good about trusting your information and your money with a particular brokerage. Top brokers typically will report how they invest in the latest online security measures to protect their customers. This makes sure they are fully protected from interference by outside parties at all times.
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To make the most sound decisions, you need access to robust, reliable data, plus easy-to-use tools and online resources. You need access to a robust collection of data and tools, and you should make sure your options brokerage can make the following available to you:
- Basic charting – access to this can help you quickly choose entry and exit points
- Screening tools
- Frequently updated quotes feed
- Ability to analyze the maximum upside and downside of potential trade options
Consider these your must-haves. The nice-to-haves for those who are interested in more complex trading may include features like real-time market data, ideally from multiple providers. Furthermore, they offer the ability to create and test trading strategies, and even provide customizable screeners.
Before you sign up for any fancy bells and whistles, make sure you know what’s included in your brokerage account. Also, know which features may require additional fees. For example, some of the more professional-level tools may be available only to options traders who maintain a minimum balance and/or meet specified trading levels within a given timeframe.
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Value for Fees and Commission
This is one of those areas that can be tricky – you want to consider the price of commissions, but not at the expense of everything else. It is possible to weigh the number of commissions so heavily that they overshadow all other considerations. Commissions are a quick and easy way to compare various options trading brokers but don’t use them as too much of a shortcut. Some other factors are more important than price, especially over time. Commissions are charged on every transaction you make, whether buying or selling, so they’re an essential component to consider.
Types of Fees
Usually, you’ll see brokers charge two types of fees. First is the per-trade fee, which generally represents a minimum fee per transaction – no matter how many options contracts are involved in each trade. You may also see this fee referred to as a ticket fee. The second type of fee is the per-contract fee, which is charged for each individual options contract involved in each trade. To determine the total commission, some brokerage firms simply add the total for each type of fee to get a general commission. Others may choose to charge you only for the higher of the two expenses accrued. Make sure you know how a given brokerage calculates commission so you can make an informed decision about whether it’s worth it.
Profiting From a Trade
At the end of the day, of course, the less you pay in commission, the more profit you keep, but you also need to consider the overall value. For example, cheaper discount brokers can afford to charge rock-bottom prices if they don’t offer robust platforms in the first place or offer additional data or online tools. With a more established or larger brokerage firm, on the other hand, you might pay higher commissions, but you also have access to more sophisticated online tools, data, and information that help you research appropriately and make better decisions – ultimately leading to a higher profit.
If you’re new to trading options, or if you only do so sparingly, your best option might be to find an options brokerage who will charge a single flat rate or a commission plus a per-contract fee. Some people new to options trading also may choose to start with a full-service broker, with the option to move to a discount broker once they feel more confident and experienced.
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What’s a Commission Worth?
Otherwise, consider carefully what a commission is worth to you in terms of customer service, data, tools, and information that help you be successful. Make sure you’re familiar with how your chosen broker’s commission structure is laid out. We think the best brokers offer a reasonable, moderate commission that allows them also to offer high-quality research, trustworthy customer service, and easy-to-use trading tools. Ultimately you have to choose the broker whose overall value you feel best about.
Sometimes, to justify or make up for lower-end brokerage fees, some firms may levy a slew of additional fees that you need to know about. To follow is a list of some of the most common extra costs that you should make sure to research:
- Annual maintenance fee: This is a fee charged every year just for keeping the brokerage account open, regardless of whether you’ve made any trades.
- Account inactivity fee: This is a fee charged if you fail to make any type of transaction for a pre-specified period of time.
- Minimum balance fee: This is a fee charged periodically, sometimes monthly or quarterly if your account balance falls below a predetermined threshold.
The Broker’s Reputation
A great place to start is to ask for broker recommendations from trusted friends or colleagues. This is an ideal way to assess a broker’s reputation and what he or she has been able to accomplish for other options traders. A trustworthy, professional broker has likely built a strong base of satisfied customers that can give you a good picture of what it’s like to work with this particular broker – strengths, weaknesses, etc.
If you aren’t going with a recommendation from someone you know before you sign on with anyone, you can do a quick online search to look for comments, reviews, etc., which may help you form an opinion on the broker’s reputation. Also, you can always ask a broker for references, which allows you to connect with current customers to find out what their experience has been like. And finally, make sure to make good use of third-party resources – like this one – that can help give you a start on the most reputable brokers in the business.
A critical component of reputation is the National Best Bid or Offer requirement. This is an SEC regulation stipulating that a broker must guarantee customers the best possible ask price when buying securities and the best possible bid price when they sell securities. Looking for brokers that guarantee trade execution prices meeting or exceeding the NBBO can help ensure that you’re working with the most reputable brokers.
You may be able to find some brokers that will offer you a lower rate if you reach a predefined trading frequency. If you know you’re an active trader who’s likely to make dozens of transactions per month, you’d be wise to seek out a firm that rewards this kind of substantial trading activity.
Commitment to Customer Education
This is a little different from customer service. A genuine commitment to customer education will show that your intended options broker wants to help you become a savvier, more informed, and ultimately more successful trader. What does this look like? It may take the form of many resources that help educate options traders. This list includes informative webinars, online options trading courses, face-to-face meetings with experts or coaches, or even one-on-one coaching either online, by phone or in person. It will be easy to see whether your considered broker wants to help customers become more independent and self-sufficient options traders.
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Best Options Brokers: Our Top Picks
If you’re still looking for a good starting point for considering options brokers, below you’ll find a list of some of our favorites. They are based on the consideration qualities we’ve outlined above. These are presented in no particular order.
Ally is a good choice for investors who are relatively active and enjoy a healthy trading balance. This firm will reduce its commissions if you trade more than 30 times per quarter or if you keep a minimum of $100,000 in assets with the brokerage. Regular base commission is $4.95, plus $.65 per options contract, and the reduced rate is $3.95 base, plus $.50 per options contract. You’ll get access to basic research with Ally, and if you have other accounts with the firm, you’ll enjoy the ease of consolidated access. The free charting, data, and analytical tools, plus research that Ally offers make it a solid choice for just about any investor.
What we love about Charles Schwab is its keen focus on what’s right for the customer and the value that’s placed on the customer relationship. The pricing is fair, and with this broker, you’ll have access to robust research to back your choices. The Charles Schwab StreetSmart Edge options trading platform is highly rated for ease of use. At the same time, the Charles Schwab customer service ethic is unparalleled. It’s earned its reputation for customer service the hard way, year after dedicated year of putting the customer’s needs first. Options commissions are $4.95 base, plus $.65 per contract, and there’s no minimum account balance.
Fidelity is a solid choice for an options broker; the firm charges reasonable commissions. Plus it offers outstanding customer service and is one of the most highly regarded trading platforms in the industry. Options commissions are $4.95 plus $.65 per contract, and Fidelity requires no minimum investment. However, if you open an account with $50,000 or more, you’ll get 300 commission-free trades.
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This firm is geared almost exclusively toward professionals, offers two robust trading platforms, and is well-known within the industry for its reasonable prices. There’s no base commission, and options commissions start at $.70 per contract. And for active traders, typically those making 10,000 trades or more, the fee drops even lower. There is a $10,000 minimum balance expectation, and the platform also offers international trading capabilities. This may not be the best option for lower-volume or inexperienced traders for two reasons: the high minimum balance and the fact that the brokerage charges an inactivity fee.
OptionsHouse – now by E-trade
OptionsHouse is one of the best options broker choices for new and inexperienced traders. With its intuitive and user-friendly platform interface, low commission charges, and quality trade execution, OptionsHouse makes it easy to get the hang of trading options. And if you’re feeling hesitant, OptionsHouse even offers a virtual trading tool. You can test out trading options in a simulated environment without risking any of your real money.
Robinhood is a prime brokerage to start with, especially if you’re sensitive to cost. It’s free – and we mean free. There are no hidden fees anywhere. This trading app offers $0 options trading commissions. However, also be advised that the research and other tools available with other brokerage options are not included with Robinhood. It’s straightforward and no-frills, which allows the brokerage to keep costs where they are – at zero. With Robinhood, you do get access to a trading app that’s relatively easy and intuitive to use, and there is no minimum investment requirement.
TD Ameritrade long ago earned a solid reputation for taking the complexity out of stock trading, and it’s also a reliable option for options trading. With no minimum investment and 60 days of commission-free trades with a qualifying deposit, TD Ameritrade supplies above-average customer service and trading tools that are easy for beginners, yet robust enough to satisfy seasoned options traders. Its $6.95 per trade rate is higher than average, but justified by the combination of perks and personalized customer service.
TradeStation is a sound option for especially active traders, and it gives you some flexibility in terms of pricing. You can either choose base commissions of $5, with a per-contract fee of $.50, or a flat $1 rate per contract. With that fee, you don’t get access to fundamental research, but you can access TradeStation’s Options Station Pro tool. This tool can help you both evaluate and place your trades. The base commission pricing model, however, gets you access to one of the most robust collections of research resources and analytical tools you can find. With TradeStation, you do need to maintain a $500 minimum balance.
Next Steps for Finding the Best Options Broker
At the end of the day, finding a good options broker can help take some of the anxiety and even risk out of options strategies. Just be careful to do the right level of research and make sure that you’re judging all your brokerage options holistically, rather than on one individual element like price. You want to find the option that best meets all of your needs. Or, you can even consider opening multiple brokerage accounts to see how various options work for you if you just can’t commit to one be-all, end-all firm.
And the good news is that no options broker decision has to be permanent. If the broker you choose doesn’t turn out to be the broker of your dreams, you can always move on to somewhere else. With so many reliable and reputable options brokers on the market, you’re bound to find at least one partner you can count on.
Who’s your favorite options broker? Tell us about it in the comments below.