Getting Started With Your Online Broker
Picking the right trading platform/online broker is an important part of any options strategy. There will be key information that you need to find out along the way.
As you select your broker, be sure and get details on their commission structure, software, and whether the data you’ll be receiving is real time. Ask them about their fee structure and discounts if you’re funding a new account – many brokers offer incentives for you to trade with them…
Most brokerages allow you to open an option account with relatively simple paperwork, most of which can usually be done online. Trading options is generally allowed in most IRA accounts, but be sure to verify this with your broker of choice, as policies can vary.
Once you’ve selected a broker, be sure to “paper trade” a few times using their platform, so you can become familiar with how everything works and where all the features are. This is a great time to contact their trading specialists if you have any questions about the process or notice something that doesn’t seem right. There’s nothing worse than wanting to make a trade and not knowing precisely how to do it.
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Know Your Trading Costs
Commissions are only one of the costs associated with a trade. But they are important and should be one of the determining factors in deciding which broker to use.
In addition to commissions, there are a variety of fees that will add to the cost of the trade. These will include exchange fees, regulatory fees, transaction fees (on sell orders) and clearing fees. These fees can add a minimum of $0.33 to a one-contract order and $1.61 to a five-contract trade. They can be higher at some brokers, and other fees can be added, such as confirmation fees and processing fees.
Needless to say, it’s important to know your broker’s fee structure.
Finally, the spread between the bid and the ask price is another cost. For example, the bid on an option may be $0.90 and the ask could be $0.95. Market buy orders are completed at the bid price, and buys are completed at the ask. Buying at the market (for $0.95) and selling at the market (for $0.90) in this example would be a loss of $0.05 per contract.
Bid-ask spreads are a product of the stocks themselves, but some brokerages such as Interactive Brokers and OptionsHouse make markets in some stocks and may allow for you to be filled in-between the bid and ask prices. The more volume a stock or ETF has, the more liquid and tight the option spreads will be.
Trading options can be lucrative. But it’s important to know the ins and outs of your brokerage’s platform before you begin trading. Also, pay attention to costs – it’s a crucial part of successful trading. Using a lower-cost broker and limit/stop orders is an easy way to reduce costs.
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