Choosing a Broker

Whether you are first learning to trade options or are an experienced trader, it's important to use a broker who provides the services that you need. There's no reason to have an account with a broker who makes problems for you.

Some traders/investors require personal intervention by a broker.  They need someone who offers investment advice and guidance.  These days, with online trading, fewer and fewer investors (and almost no traders) require such advice.  But it's an individual decision.  If this is what you need, then go with a full-service broker.  It's going to be expensive, but if you don't yet have the confidence to make all your own decisions, this may be your only alternative.  You can also open a 2nd account with a discount broker for a portion of your trades.

For Internet savvy investors, it highly likely that the cost of commissions is a far more important factor when selecting a broker than the availability of obtaining personal advice.  There are several brokers who offer decent service with very low commissions.  I use one such broker myself, but there are good alternatives.

Other traders don't mind paying a bit more for better service.  How can the broker give better service? 

  • By having a customer service group that provides excellent and timely answers to your questions and problems.
  • By providing an easy to understand trading platform so that entering orders is a snap.
  • By providing exceptional analytical software that allows you to carefully monitor your positions and manage risk.  Not every traders needs such software.
  • By providing good execution of your orders.  This point is extremely important.  Low commissions are unimportant when compared with getting your orders filled at better prices.  It's not easy to know when you are getting bad fills, but if your broker never gets a better price for you than the advertised bid or ask price, you are not getting the executions you deserve.
  • By providing special services to their customers who trade options.  Some firms pay little attention to option traders and not only charge too much and provide poor executions, but also hinder your ability to trade.
  • By not being restrictive and allowing you to adopt option strategies that are suitable for you. Be careful if you choose a broker who allows any strategy because some methods are not suitable for beginners and you may need someone to protect you from yourself.  But several brokers allow one strategy (covered call writing), but don't allow a strategy (cash-secured put selling) that is equivalent in risk and reward.  That makes no sense, but there are such brokers.  Avoid them.
  • By allowing you to be comfortable.  That means you can use the software (with no fear of making a buy vs. sell error), their research tools, and anything else that you require to help you trade without external worries.

One way to discover if a broker works for you is to ask people you trust, but better yet – open a paper-trading account and experiment with their trading tools.  If they are easy to use, charge acceptable rates, and provide the tools you need, give them a try.  In addition, call customer service with a test question and see if you like the timeliness and accuracy of the reply. 

You can also find broker ratings online.  SmartMoney and Barron's publish such ratings.

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