Finding an Options Broker

[Igor 10]

To trade options, an investor must open an account with a brokerage house that has a seat on the trading floor of an option exchange. Traders can choose to open their account with a personal (full-service) broker, online (discount) broker or a broker that offers both services. Personal brokers offer traders more help, but they charge more in commissions and fees. Online brokers are cheaper but they only offer limited support. Some brokers offer both full and discount service, giving the trader a choice when placing their orders. A broker's quality of service depends on the broker themselves and varies throughout the industry.

 

Personal Brokers

Traders use a personal broker when they seek financial advice or need a human being to place a buy or sell order for them. Most traders do business with personal brokers by telephone. Personal brokers can guide an investor, who is new at trading options, in placing their orders correctly. They also can give a trader advice before placing orders, and they can help a trader come up with an investment strategy that fits their needs. Personal brokers charge three to five times more in commissions and fees than online brokers. Personal brokers are useful when traders do not have a computer or an internet connection available to place an order.

 

Online Brokers

Traders familiar or comfortable with option trading can place orders themselves using an online broker. Sometimes called home broker, this system provides a direct link between the options trader and the exchange floor when executing their buy and sell orders. The home broker is a do-it-yourself type system that does not give traders financial advice, but rather provides the tools for traders to find the information on their own. Discount brokers build a variety of tools into their home broker systems, which include real-time streaming, order entry windows, historical financial data indexes and real-time graphic analysis. Order execution speed and online sever availability depend on the chosen discount broker's quality of service.

 

Broker Fees and Commissions

All brokers, both personal and discount, charge commission fees. Traders add these fees into buying costs and deduct them from their profits. In other words, each time a trader places an order or uses personal broker services, the brokerage house charges a fee. A trader should consider commission fees when developing their investment strategies.

 

Is Cheaper Better?

Most traders think that the best option broker is the one that charges the lowest commission fees. Lower fees are great when an investor works with low margins, but they are worthless if the broker's quality of service is inferior. When finding the best options broker, traders should consider other factors that affect order handling, including server capability, speed of order transmission to the exchange floor and the overall user experience of the broker's online ordering system.

 

Server Availability

Online brokers use servers to handle their online traffic. Some servers are larger than others, and the home broker's service availability depends on the brokerage house's infrastructure. Low broker fees are not an advantage if the trader cannot place their orders when they want.

 

Home Broker User Experience

Traders need to place their orders fast and easy. Their home broker system should be easy to use, simple and straightforward. The system should offer the trader a single order entry window that gives them alternatives in placing their orders, which include placing stop orders, short selling, placing market orders, covering calls and placing limit orders.

 

Order Execution

Traders who buy and sell orders need their orders to execute. Once executed, the trader needs to feel at ease that their broker will guarantee the price executed on the order. Some home brokers do not guarantee that executed orders will have the best available bid-ask price available. The National Best Bid or Offer (NBBO) requires brokers to meet SEC requirements, which give traders the best-quality service. Options traders should look for discount brokers that exceed NBBO standards.

 

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