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Choosing an Options Trading Broker - It's Not Just About Commission Rates

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  • Choosing an Options Trading Broker - It's Not Just About Commission Rates

    Before jumping into the various criteria that can be used to evaluate prospective options brokers, I want to lay the groundwork by describing the active options trader's world... at least my world. From this I think you'll see why I have the criteria I do.

    The active options trader's world

    When I say I'm an active options trader, I mean that I regularly enter options trades in various forms, mostly spreads (see my article on premium selling strategies for more on this). I also mean that I may do this multiple times in a day. I make decisions to enter a trade, do quick analysis and then I want to set the trade up, select a price and quantity and enter it. Sometimes the market is moving at a such a quick rate that the time window of opportunity is a matter of minutes. I often have the same requirement to exit the trade or make a trade adjustment. I not only want the ability to enter orders quickly but I also want to quickly construct standing orders that can help me exit the trade when a target profit point has been reached or I've hit my maximum allowable loss point.

    Because of the nature of my trades, I depend on getting a certain amount of theoretical edge on the trade. That means I may sell a spread for more than the offer price and buy a spread for less than the ask price. I often attempt to hit the midway price between the bid and the ask price. As a result, getting the best price possible on either side of the trade is critical to me.

    Another important part of my trading is having the ability to quickly assess my overall positions as a portfolio and knowing where I stand in my overall delta exposure and in regards to the other aggregate Greeks. Successful trading to me includes managing my portfolio and overall directional risk, consequently being able to get a quick view of these values is important to me.

    One final aspect of my world I want to cover is in the area of being nimble. In the course of my trading, I often ask questions for which I want to arrive at the answer quickly. Some of these include:
    1. What kind of credit can I get for this position I'm considering?
    2. What can I close my position for?
    3. If I add to my position, what is the impact to my overall portfolio?
    4. What is the best strategy to hedge some of my directional risk?



    With this background in mind, I now want to turn to the three key criteria I believe are important when evaluating options brokers.

    Criteria #1: Trading platform

    Earlier, I mentioned that agility is important to me as an active options trader. The trading platform to me is a key enabler to being agile. The ability to quickly answer questions, do analysis, set up a hypothetical trade, and adjust various parameters prior to entering an order is critical. To do all of these things, I often need to access different information such as P&L graphs, risk profiles, theoretical prices given a future date, price and volatility, etc. I find myself switching back and forth between the different information areas frequently. I need a platform that can keep my pending order details while I do further research.

    Furthermore, I need a platform that is able to answer all my questions rapidly. When I'm considering a credit spread or a calendar spread, I want to quickly be able to know what the credit might be. I want to know the delta, theoretical price, probability of the short strike expiring worthless, etc. I may want to know the probable range of movement of the underlying stock or ETF for the given time frame.

    Of course, charting is important and virtually all trading platforms provide some kind of charting tool. The ability to apply studies, view different time frames and the ability to annotate a chart are all important features to me.

    Criteria #2: Order routing

    I mentioned that getting a good theoretical edge is important to me. I'd argue that a broker that can get me the best theoretical edge is well worth the incremental commission it may cost to trade there. Usually the ability to get good fill prices is related to order routing (assuming sufficient open interest).

    For me, order routing has two aspects. First is making sure my order gets sent to the widest range of options exchanges. Most options trade on more than one exchange and doing so helps better provide fair pricing and a more liquid market. The second aspect is the speed with which my order is sent to the exchange. In the ideal world, I want my order at the exchange the moment I press the send button. With rapid price movement, time is of the essence.

    Criteria #3: Support & Education

    While somewhat less critical than the first two criteria, support and education are still very important to me. There have been many times I've been looking at a position and considering an adjustment and I just wanted an opinion as to whether my analysis was correct (Note: I am not asking 'Should I make the trade?'). There's nothing like getting on the phone or a chat session with someone at the brokerage to ask if I'm missing something in my analysis. Having people who are also active traders is a huge help because they talk my language and understand my world.

    Any options brokerage that offers ongoing, quality education benefits both trader and brokerage. The better trader I become, the longer I stay in the business, the more I trade, the more commissions they receive. An options brokerage who is willing to invest in a variety of educational outreach programs designed to sharpen me as a trader has my interest and potentially, my business.

    Conclusion

    Why aren't broker commission rates on my list of evaluation criteria? These days, the commission rates have been driven down significantly. In addition, it's often impossible to do true apples-to-apples comparisons. For me, the benefits gained from finding a brokerage that meets my other three criteria far outweigh the extra $.50 or $1 I may pay per contract on a transaction. Don't be drawn in by apparent low commission rates on options trades.


    Article Source: http://EzineArticles.com/3598765
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    Good KARMA and positive energy abound.


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