Online Broker Commissions

The Smart Profits Report: # 331
Tuesday, July 18, 2006

Online Broker Commissions: How to Get the Best Deal on Your Options Commissions
By Lee Lowell
Advisory Panelist, Mt. Vernon Research

There’s one aspect of trading that continually seems to frustrate and irritate beginners, mid-level investors and pros alike. Saving on online broker commissions is a great way to protect your bottom line and maximize your gains.

But it’s crucial that you get a handle on it, because no matter how many expert tips you incorporate into your strategy, if you struggle here, you’re always going to play catch-up and any gains you make will always be offset. And today, I’m going to show you how…

If You’re Paying $20 Per Order, It’s Time to Take Your Business Elsewhere

The beauty of the the Internet is that it’s revolutionized the way business is done and leveled the playing field for investors. Being online is more cost-effective and the flurry of competition has driven broker commissions costs lower. In fact, I’ve personally gone from paying $19.95 per stock option contract just a few years ago to paying only $1 today per stock option contract. That’s a sweet deal.

If you’re paying more than $19.95 per trade, then it might be time for you to either find a new broker or negotiate a new rate. So let’s take a look and see how you can get a better deal…

Reading A Brokerage’s Fine Print

First of all, watch out for the small print. While stock options are the simplest form of options commissions, they have pitfalls. Chief among them is the broker who charges you a low rate per options contract - say, $0.75 - but then tacks on the additional “minimum charge per order” fee, which can often be as high as $19.95.

Of the main players, I highly recommend optionsXpress, largely because of the array of free tools it offers to options traders on its website. This is an excellent site if you’re just starting out in the options world.

But there are cheaper alternatives…

If You’re an Options Oracle, You Need “Direct Access”

If you’re an advanced trader, you might want to consider “Direct Access” brokers. Services like this are much more high-end and cater to the very active, experienced trader who doesn’t need any help with trading. The online platform is very sophisticated and has a direct link to all the exchanges, which allows you to direct your trades to wherever you want.

And because they don’t need to walk traders through the options world and provide as much materials or help, it’s cheaper for them to run their business. That means they can pass those cost savings onto traders by way of cheaper online broker commissions.

One of the leading online brokers in this area is InteractiveBrokers.com (www.interactivebrokers.com). I use them for the bulk of my stock, options and electronic futures trades, and it’s a website that many other active, advanced traders use, too.

The huge bonus? Interactive Brokers charges $1 per option contract. No joke. That’s $1 per options contract, with no other fees attached whatsoever. It’s a great deal, especially if you trade in small quantities.

Once you’re comfortable trading, I advise you to make the step up to a direct-access broker and reap the rewards of lower online broker commissions. A couple of other alternatives in this category include: www.tradestation.com and www.thinkorswim.com. Both are highly regarded by the trading community and have a large following.

Why is the Futures Market Light Years Behind The Online Curve?

Unfortunately, the futures options arena is still light years behind the equities markets in terms of going all-electronic. This includes the commodities markets such as gold, silver, oil, corn, soybeans, coffee, sugar, cocoa, orange juice, cotton, bellies and hogs.

The simple reason for this is that the commodities exchanges still operate under the “human interaction” model, thus keeping broker commissions sky-high. And while you can certainly trade these contracts online, the orders are still handled by pit traders for actual execution.

In addition, if you want to trade commodities, this is where things can get a little tricky…

Because it’s a very different, distinct type of market, you’ll have to actually open a separate “commodities” account. You can do this through one brokerage if it handles stocks, options and commodities, but that’s the first requirement.

But I’m now about to expose one of the little secrets about commodity option brokers with regard to their commission structure. This is something I know they wouldn’t want me to divulge, but here goes!

The Commodity Brokers’ Dirty Little Secret

When you initiate a commodity option trade, the broker will charge you on a “round-turn basis.” This basically means that the broker is charging you up front for the opening and closing transaction - regardless of whether you end up closing the transaction. Specifically, I’m referring to options that expire worthless. When you buy or sell an option, you do so knowing that the option might expire worthless at expiration. And despite the fact that these options don’t need to be offset (because they’ll just expire), the brokers still charge you up front for both sides of the transaction anyway.

Sneaky, huh? This is something I bet many investors miss on their statements. Here’s the solution…

Don’t get caught out: Before you open a commodities options account, ask your broker to charge you on a “half-turn basis.” This means you’ll be charged the appropriate fees only when you make a trade. So, if you own an option that expires worthless, you won’t be charged for that side of the transaction.

I still don’t know why the commodities industry operates this way, but it does. So be smart and negotiate the half-turn basis if you can. Some brokers may oblige, but that might depend on your account size and how many trades you do. Just don’t be afraid to ask.

Your Traditional or Online Broker Action Plan

Here’s your action plan for today. Take a look at your brokerage:

What does it offer you?
Is it easy to use?
Are you getting what you need?
And more importantly, are you paying too much for your online broker commissions?

You owe it to yourself to get the best possible deal. Don’t shoot yourself in the foot before you’ve even begun to trade.

Good Trading,

Lee Lowell

Today’s Smart Profits Cribsheet

Don’t become a trading expert… only to be let down by a bad broker. Get a handle on this part of your investment life today by following our quick guide to finding the right broker in Smart Profits #302, The Search for a Good Broker: Five Tip-Offs Your Broker’s a Fraud.

Of course, once you’re in the game, that doesn’t mean it’s over. There are going to be times when brokers are going to try to pull a fast one on you. Don’t let them! Find out how to break down the brokerage walls - and win the battle. Check out Smart Profits #112, Battle With Your Broker: Make Your First Options Trade in Three Easy Steps

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