Thu, Dec 4, 2008 | Jared Woodard
Commissions are a cost of doing business, and as such shouldn’t be ignored. It’s worth the trouble to spend a few minutes checking that your commission structure matches with your trading style, and that you’re getting the best rates available.
But paying too much attention to commissions can be a double-edged sword: there’s a certain type of trader we hear from pretty regularly, the sort who obsesses about commissions, 60/40 tax treatment, exchange fees, etc., such that they seem to spend more time trying to bring down fixed costs than they do actually trading. The old maxim is that you should treat trading like a business, right? Well, a trader who obsesses about commissions or other costs instead of spending that time improving his trading is like a restauranteur who tries to make money by bringing down shipping costs instead of making sure the filet mignon is fresh.
One area that does merit attention if you’re trading a lot of option spreads is how your broker treats those spreads. A per-order ticket charge might not be the worst thing in the world if it gets you a low enough price per contract, provided you can actually submit multi-legged orders (some legacy brokers use platforms that still don’t seem to support this). And if you’re going to get serious about risk-defined options trading, it’s also worth thinking about the value of the various tools and analytics that a given platform provides.
Just to cite some examples: reader Jesse F. alerted us to the fact that Optionshouse appear to have cut their already low commissions even further, including a $14.95 flat rate for multi-legged orders (up to 4 legs). The notion of buying a hundred straddles or selling a couple hundred iron condors for $14.95 is pretty incredible. On the other hand, brokers like optionsXpress and thinkorswim offer much more powerful platforms, even if their commissions aren’t so rock-bottom. If you’re some sort of demigod who can thrive with just a data feed and a pencil and paper, maybe commissions are literally the only thing you should consider; however, some traders may want to balance low commissions with helpful analytics packages. And we haven’t even touched on the issue of execution, which is extremely important but also nearly impossible to evaluate comparatively, since everyone claims to offer excellent execution in the absence of any objective independent verification.
We intentionally avoid endorsing any one particular broker only because no one broker offers the best of all worlds (yet). Low commissions are important, but so are trading tools, execution, product diversity, and platform speed – meaning that the “right” broker and commission structure really will be different depending on your account size, experience, goals, and trading style.