Which Is the Best Broker for Options Trading?

Evolution of Internet has revolutionized how brokering services work. Gone are the days when you needed to pay prohibitively expensive broking charges to be in-an-out of a trade and had no access to technology or analytics. If you are a self-directed investor, these days you have plenty of choices to choose from.

Ms. Theresa W Carey of Barrons, recently published an excellent and very exhaustive review of Brokers. Without a doubt, Barron’s listing is one of the most complete and trustworthy list of brokers and I am very appreciative of this work which has been very useful over the years for my preliminary selection of online brokers. In this post, I shall share an active option trader’s perspective to choosing brokers.

Here is the list of brokers from Barrons arranges for various categories:

Best Brokers via Barrons Mar 2013

For other points i.e. Trading Technology, Usability, Mobile, Range of Offerings, Research amenities, Portfolio analysis and reports, customer service and education and costs you may read the original article. The overall list has 24 top-notch brokers ranked on the above 8 broad categories. From “Usability” perspective “tradeMONSTER” was the best, in “Technology” category TradeStation was the winner but overall champion was Interactive Broker.

From an Options Trader’s perspective, the Top 3 were 1) tradeMONSTER, 2) TD Ameritrade and 3) OptionsXpress.

Best Broker by Needs, Barrons March 2013

I have been using online discount brokers for the past 15 years starting with Datek which was acquired by Ameritrade. Having used all Top 4 and Trade Station, I was surprised that Tradestation didn’t show-up in the Top 5 platform for option traders. I have been a strong supporter of ThinkOrSwim (as Tom used to listen to us, the real option traders and build features that were most useful for us) as well as tradeMonster. I like both and recommend both. However, I think OptionStation (from TradeStation) also deserves equal recognition. Albeit, a trader needs to decide for himself what’s best for him.

A platform’s need changes depending upon your trading experience, capital size and style of trading. Assuming usability, comprehensive charts, risk/rewards analytics, research reports, good scanners and reliable data feed as basic “points of entry (PoE)” for a good broker; here are 5 key “points of differences (PoD)” that differentiate an excellent broker from a good broker (More later).

1. As simple as it may sound, “Mid-Price” is a very handy and important tool for an option trader. Even today, I rely on it extensively to place and modify my orders. If a trading platform doesn’t offer this feature, I need to think twice before joining them. Some brokers, even today, don’t offer “mid price” tool. Even if your broker does offer the mid price, check out the mid price for credit spreads if it is correct.
2. Another very important feature that I suggest to review before joining, how many clicks you need to “place” or to “modify” your order (price, quantity or both). For example, if I am trading an Iron Condor which consists of 4 options leg and I had to fill details for all 4 manually and then keep revising the order with the price & time, I will simply keep on doing this while missing out potential opportunities. Does your platform fill at least the months and underlying automatically? If it doesn’t, It will be a nightmare, as one might have to fill underlying, month, strikes and then quantity and then prices (and if it doesn’t have mid, then you need to have a calculator handy). You might have to either get a fill at bad prices or you will be frustrated. At times, time is of essence and I don’t want to be stuck when I need simplicity the most.
3. Chart trading comes handy for visual traders. For instance, as an active trader, I might simply draw points on the charts where I want to get in and get out.
4. Can I backtest my strategies? Subscribing to the software that allows backtesting can cost huge sums. Ouch! There are only a few platforms that allow you to back test your strategies. Many a times, traders underestimate the power of back-testing. However, as a trader evolves and start to systemize his or her trading, this feature alone can save and add $$ to the bottom-line.
5. How does a broker’s platform arrange positions for buying power calculations? Don’t under estimate this. As an option trader, I trade Iron Condor, Butterflies, Calendars, ratio spreads, back spreads, diagonals, straddles, strangles and many of my own proprietary combinations. I may have multiple strategies for the same underlying. If your broker’s software auto arranges those in funny ways such that your buying power reduced dramatically or worse negative, you can’t trade. You will then have to call their customer service to place orders!! I have had experiences when I had more than enough buying power but my broker’s software arranges them in such a way that I couldn’t trade. I had to call the customer service and it took them a lot of time before they could even understand my positions. In the meanwhile, markets had already moved. They told me they know there is a “bug” in their system (for months and still no resolution to this). This can be a frustrating experience for no fault of traders.

Bottom-line, I suggest you read Barron’s excellent review for various details and add a trader’s perspective as listed in 5 points above. When you combine the two, I hope, you might be able to find best solution for your trading need. If you need my help, please feel free to write to me. I shall reply to you within 48hrs.

Please feel free to distribute this article (without changing contents) to your trading buddies and friends you care about. You might save them lot of trouble, frustration and money in future.

Profitable Trading, OP