by Amanda Harvey
An option broker is an individual or a company that arranges the buying and selling of options on behalf of traders. With the development of technology, most brokering is conducted online. While there are brokers with whom a trader can still interact personally, for the large part, the days of yelling “buy” and “sell” into a telephone are a thing of the past.
An option broker is essentially an intermediary between the buyer and seller, and they receive a commission for the role they play in each deal. The primary task of the broker is to facilitate trades by bringing buyers and sellers together. In the US, brokers are regulated and must be licensed by the Financial Industry Regulatory Authority (FINRA).
How to Choose an Option Broker
When selecting an option broker, there is a range of criteria for a trader to consider which can help to pinpoint the most suitable broker amongst the many choices available. As with everything in life, there is no one right choice that will suit all traders. There are many variables on the trader’s part, which include the volume of trading they intend to conduct, the time commitment they wish to make, their own level of expertise, and their amount of trading capital.
One important consideration is the amount of commission and other fees that the broker charges. While there is quite a variation between the costs incurred by using various different brokers, it is important to consider value and not just price. While some brokers may charge higher fees, clients often consider these to be justified by the level of service and other features that they receive.
For traders with a limited amount of capital, as well as seeking a broker handling options and that offers competitive commission and fee structures, it is also important to choose a broker that does not require large start-up deposits.
Aside from cost, the important areas that a trader should evaluate when choosing a broker include customer service, options trading platform features and usability, and additional tools offered for research and analysis. While experienced traders may prefer a sophisticated trading platform, beginners often find a simple interface more suited to their needs.
Option Broker Recommendations
Ian Harvey, in his own trading career as well as his work as Director of Stock Options Made Easy, has extensively researched online option brokers, and below are his three top picks.
Interactive Brokers offers a very good platform for trading options, and traders based outside the US may also open accounts. The service offered is good, with efficient communication. Trades are executed quickly, which is a very important consideration.
Although this broker requires a relatively high account minimum of 10, 000, their varying commission plans tend to be lower than other brokers. Fees are charged for advisory services.
The options trading platform provided by this broker is fairly good, and Firstrade also accepts international accounts. Execution of trades is good, and communication is effective.
A benefit for traders with limited investment capital is that this broker has no minimum amount required to open an account. Options commission is a flat fee of $6.95 plus an additional cost of $0.75 per contract with no minimum. Broker assistance fees apply at $19.95 plus $0.75 per contract.
The option brokerage, optionsXpress, offers a trading platform which is effective for trading options and quite user-friendly. International accounts are available, and efficient service and execution of trades are provided.
There is no minimum account requirement, and options commission is a flat rate of $14.95 for up to 10 options contracts (or $12.95 for the Active Trader rate). After 10 contracts, the cost is $1.50 per contract (or $1.25). One of the benefits of this brokerage is that there are no broker assistance fees.
Having a broker that deals with options and that also provides a good option trading platform and service is a very important part of trading options. An individual trader must assess which broker meets their particular needs, and the content of this article offers information which can assist in doing so.