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Battle With Your Broker

Battle With Your BrokerThe Smart Profits Report: Issue #112
Thursday, May 20, 2004

Battle With Your Broker: Make Your First Option Trade in Three Easy Steps
By Karim Rahemtulla
Investment Director, Mt. Vernon Research

As I pointed out in the last letter, being mature, sensible and experienced is not the magic key to the options kingdom. Many brokers make it hard for you to get in. And when the salesman - I mean broker - that you deal with isn’t comfortable with options himself, expect a battle with your broker.

There are times when Smith, Smith and Smith will tell clients in the Roanoke office they can’t trade options, yet the same firm’s Boston office is approving people just like them. I’ve heard from investors with million-dollar portfolios who were turned down. They could easily afford to put some of their money to work at higher risk for higher potential returns.

Most of the time, it’s the broker who is wrong. Occasionally, the broker is right. The customer who is on the phone with panicked questions every time one of his stocks drops 50 cents is not going to be a good options candidate. If you’ve been over-nervous and showing it, better cure that habit before trying to get an options account.

But if you are ready to go and the broker is the only thing standing in the way, then fight back. There are other ways to get in the door - including the three listed below.

Fire Every Broker Who Gets in Your Way

Okay! Getting started trading options can present some challenges. That’s reality, but it’s not very hard to overcome. So what can you do if you want to trade options but are rebuffed by your firm? Plenty.

First, check with two or three brokers. Each brokerage firm is different. They want your money and some may be willing to cut some slack when it comes to qualifying you. This is the best way to get in. It’s quickest and costs the least amount of money and time while you make your point.

But if that doesn’t work, you will have to establish your reputation by proving yourself a trustworthy customer. (Of course, you are a trustworthy customer, but I mean from the brokerage’s viewpoint - one who presents no trouble and keeps sending money.) So your second choice if you’ve been locked out of the options world is to force your way in…

Break Down the Door to Options Trading…

If you didn’t find a willing broker by shopping around to several, go to the second strategy. Set up an account that allows you to trade covered calls - at least you will now have a starting point and be in the options system.

Once you have that account, you should start with very low-risk covered call trading. This means buying 100 shares of a steady company like GE and selling a very deep-in-the-money call against it. You may only make 1% or 2% on this trade, but you will begin to develop some options history.

Or, Check Out Our Recommendations

Finally, once you’ve gotten established, even if it’s just with covered calls, you can go to a better solution. Contact any brokers on our recommended brokers listing (see Today’s Cribsheet) and see if you are qualified to trade options with any of those firms.

You will still have to qualify, but you won’t be dealing with a wet-behind-the-ears beginners. Once you’ve developed your history, you can answer that all-important “experience” question on the form truthfully by saying that you do have options-trading experience. That will open the door to trading all types of options in the future - including the ones that can produce triple- and even quadruple-digit returns.

Good Trading,

Karim Rahemtulla

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Today’s Smart Profits Crib Sheet

  • Looking for a recommended broker? Check out our listing.
  • If you’re new to the world of options trading, all the terminology can get a bit confusing (for example, do you know what a “deep-in-the-money” option is?). To help clarify the lingo for you, feel free to drop by our Smart Profits Glossary.

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