Evaluating Brokerages and Comparing Their Commissions

10/28/2014 8:00 am EST

Focus: OPTIONS

Alan Ellman

President, The Blue Collar Investor Corp.

Alan Ellman of TheBlueCollarInvestor.com shares a review of the commission structure of some of the more prominent brokerages that offer options trading platforms and services.

Options trade executions include a discussion of the levels of trading approval needed to use various options strategies. You will recall that these defined levels will vary slightly from one brokerage to another. Here is a chart reviewing a sample of these trading levels:

chart
Click to Enlarge

Covered call writing as well as put-selling are short-term strategies that require frequent trading. This is the antithesis of a buy-and-hold strategy. Therefore, commission costs will play a major role in our annualized returns much like expense ratios significantly impact the returns we realize from mutual funds. For this reason, we cannot consider using full-service brokers to execute the sales of our covered calls or cash-secured puts. They simply cost too much. So we turn to online discount brokers who allow us to execute our trades online at reduced commissions, absent the investment advice and other services full-service brokers offer.

Most of the major brokerages are reliable, ethical, and efficient as it relates to the execution of our trades. They also offer phone support if we experience any problems with the trading platform. They just won’t offer advice unless we are willing to pay for it. Don’t pay for it. You don’t need it. Education is power and will lead to the confidence we need in order to trade like an expert.

When doing our due diligence as to which online discount broker to select, we should factor in an evaluation of the quality of the research platforms, minimum cash deposits, and interest earned on deposited cash. But most importantly, we should look at the commissions, the fees we pay to have our broker execute our trades. This is especially important to us due to the number of trades option sellers execute.

The major distinguishing factor between discount brokerages is the cost, or commission, charged to execute trades. As the competition has heated up over the years between these firms, commission rates have fallen precipitously, with some predicting commissions will eventually approach zero. Saturday (late-2014) the rates are low, but not quite zero. The chart below lists 11 of the top brokerages and the commissions charged by each to enter an options position and for assignment (our shares being sold or shares being put to us). Web links for each of these firms have also been provided so that you can conduct further research to find the brokerage firm that best meets your needs:

chart
Click to Enlarge

A few pennies or a couple of dollars may not seem like a big issue for a single trade but multiply those stats by the number of trades executed in a month, a year, and an investment lifetime and all of a sudden we have a significant cash amount that is better off in our pockets than the brokers. The world of online discount brokers is highly competitive and they are all vying for our business so it behooves us to do our due diligence and keep as much of our hard-earned money as possible.

By Alan Ellman of TheBlueCollarInvestor.com

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