Getting Started With Your Online Broker
If you’re looking to trade options, then there will be important information that you need to find out before getting started.
For starters, picking the right trading platform/online broker is key. But it doesn’t end there. Let’s cover some of the basics you will need to know in order to select the right broker, get approval for trading options, and trade effectively.
If you plan on trading options, then you will need to obtain approval from your broker. There are five levels of approval, and each is associated with different options strategies. When you are approved for a level, you will have trading authority for strategies approved at that level as well as lower levels. Most brokers will start you off with a level 2 approval as long as you have a basic understanding of how options work.
|Brokerage Approval Levels|
|Level 1||Covered calls and protective puts|
|Level 2||Long calls and long puts|
|Level 3||Covered puts and debit spreads|
|Level 4||Credit spreads|
|Level 5||Naked options writing|
Each broker sets their own criteria for approving the different account levels. In general, experience and net worth are the most important factors that determine your approval level. Approval will be based on the information you provide on your brokerage account application.
With most of the strategies we use at Profitable Trading, you’ll only need to be approved to buy, or go “long,” options, which is a level 2 or 1 at some brokerages.
Be sure and list all market experience you have when answering your broker’s questionnaire so they can get an accurate idea of your background and give you proper approval.
Other Things To Keep In Mind
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. That way 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.
|Brokerage Pricing & Contact Information|
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. They can be higher at some brokers, and other fees can be added, such as confirmation fees and processing fees.
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 ask price, and sells 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.
If you’re looking to get started with options, then one of the easiest strategies is one that allows you to get paid instantly from stocks you already own…
You see most investors simply buy a stock and wait for the dividends to roll in. There’s nothing wrong with that, but we can use this strategy to earn even more income…
We like to think of it as an “insurance” plan, and our subscribers have been trading this way for years and pocketing thousands of dollars with very little effort.