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 THE ABC OF... |
ABC of...
Comparing options brokers - part 1
CS journalists
Choosing an options broker will largely depend on how serious you take options as well as your level of experience. Do you specialise in options trading, or do you use options as a simple hedge against losses in your share portfolio?
Serious option enthusiasts might prefer a broker who specialises in options - who offers analytical tools such as implied volatilities and deltas - and can handle complex option order types and transactions. Those who trade options as an aside to shares, for instance, might prefer to stick with their favourite full-service or discount broker (as long as they offer options), or move to another broker who offers the lot.
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"I'm looking for a broker who can handle all my investing needs. Do you know CPR?" |
Types of brokers
Do you want your broker to simply get good fills for you and execute your trade? Or do you want them offering their two cents worth on the trade you're about to undertake?
Full-service brokers are pricier but are especially helpful if you're a newcomer to options trading. These guys should be able to pile you up with the firm's research, trading recommendations, and contact you with timely advice on investments. It's easy to get confused by options terminology and trading concepts, and full-service stockbrokers can be utilised as an educational springboard in options trading.
When you establish an account with a full-service broker, you will be assigned an individual who will handle your account. Unfortunately, unless you know of a gun broker with satisfied clients, it's almost luck of the draw as to how much money you'll make. To give advice in derivatives, check to ensure that your broker has level 1 or 2 Accreditation with the Australian Stock Exchange (ASX). Level 2 Accreditation is higher than Level 1.
Most brokers derive income from commissions generated - so the more they trade their clients' accounts the fatter their pay cheque. While we're not saying that all full-service stockbrokers overtrade their clients' accounts, it's important to be aware of this incentive.
Discount brokers are generally a better bet for traders who know that they are doing, and want simple execution with a smile. A discount broker is hands-off when it comes to making decisions about how to trade your account - and for this reason they are the economical choice. For those with decisive trading plans and methodology, you probably don't want the advice of a broker interfering in your decision-making. Brokers at discount firms are often paid more in salary than commission as well, which means they have less an incentive to over-trade your account. However, discount brokers can be less personal and you'll probably deal with more than one person.
Regardless of whether you choose a discount or full-service broker, it's worth emphasising that your trading decisions on options - or on any product for that matter - are yours alone. Newcomers beware: Don't get coaxed into a trade by an aggressive broker, and don't blame your broker if the trade goes sour. Always take responsibility for your actions. Remember it's your money at stake.
Minimum account balance & margin
Before you can start trading you have to place funds with a broker. Some brokers will allow you to start trading with $10,000 - others want more than $25,000. It's worth noting that the minimum account requirements of full-service brokers are generally higher than discount brokers. Check out the comparison tables for more details.
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