Choosing an Online Options Broker

Of all the decisions you make prior to actually starting to trade options, the choice of which online options broker to use is without a doubt one of the more important ones. Of course, such a decision isn't irreversible because, you can always use a different broker if the first one you try doesn’t quite work out for you. However, it's worth spending time deciding which one to sign up with in the beginning.

Using the right broker really can have a positive impact on your trading. Online brokers are constantly improving and they generally make the whole process for buying and selling options much more efficient and easy to do. That is only true, though, if you use one of the top brokers that are very good at providing a first class service.

The process for choosing a broker isn't exactly hard, but there is a lot to consider. There are so many choices out there and although they all technically offer the same kind of service, some of them might be more suitable for you than others. Not every trader is going to have exactly the same requirements which makes it very difficult to definitively say that any specific broker is “the best."  What might be right for one trader might not necessarily be right for another.

The key is really to work out what is important to you and then do some research to find out which broker is likely to be the most beneficial for your own personal needs. We have a section dedicated to the Best Options Brokers that you may like to take a look at, but we would suggest that you first read through this page where we have covered some of the main factors that you should be considering.

  • Commissions & Fees
  • Speed & Quality of Order Execution
  • Trading Platform & Ease of Use
  • Security Measures
  • Reputation
  • Customer Support
  • Additional Considerations

Commissions & Fees

It's somewhat logical that one of the most important considerations when choosing an online broker is what the charges are. Charges can basically be broken down into two main categories: commissions and other fees.

Commissions are charged on every transaction that you make, whether you are buying or selling options, and so it can obviously add up to a sizable sum if you are making a lot of transactions. Some brokers also have a minimum commission and this is something to look out for if you are planning to make a number of small trades; some may charge higher commissions depending on what type of option is being transacted.

The additional fees can encompass a whole range of different charges including an annual fee simply for having an account, charges for deposits and withdrawals, or extra costs for making certain types of orders.

Depending on what strategies and trading styles you are using, you may be making trades that will only generate profits that are relatively small compared to the amount invested. It isn't at all uncommon for options traders to operate on quite tight margins, and this makes it very important to reduce the costs involved with making trades.

Even if you tend to make trades that have higher margins, there is still an obvious benefit to reducing costs because,quite simply, lower costs mean more profit. One of the biggest costs involved with trading options is, as with any financial instrument, of course the commissions and fees that are incurred when making transactions.

Therefore, before you sign up at a broker you should be aware of their commission structure and any additional fees that can be applied so you can be completely sure that their charges are suitable for the way you will be trading. However, it's also worth noting that commissions and fees aren't necessarily the end of it. They are clearly important, but to some extent it's true that you get what you pay for. The cheapest brokers are not necessarily the best, and it can be worth paying a little bit more if you feel a more expensive broker is better for you in other areas.

One particular reason for paying more would be if you wanted some help while you were getting started. Most online brokers are known as discount brokers because they keep their commissions low and their service is basically just to transact the orders that you instruct them to. There are also full service brokers, which typically charge at a higher rate, but give you the benefit of an experienced professional on hand to offer you advice and guidance.

Such assistance can end up being invaluable, so a full service broker may be worth considering; you can always switch to a discount broker once you gain the experience and confidence to go it alone. You can read more about these two different types of brokers at our page on Full Service Brokers vs. Discount Brokers.

Speed & Quality of Order Execution

The speed of which an online broker can execute your orders is another key factor that should be taken into account. If your broker doesn't carry out your transactions in a timely fashion, it can have a negative impact on how your order is filled and may even result in your order not getting filled at all. The best ones will typically execute your orders as quickly as possible and will be able to ensure you that they are transacted at the best possible price. Getting the absolute best prices available can make a big difference to your bottom line, so this really is something you want done well.

On a similar note, you also may want to use an online broker that has a fast and responsive site as the options market can move very quickly indeed. If your broker’s site is updating too slowly, or you are experiencing a delay when trying to move between one page and another, then this can potentially lead to reduced profits, missed opportunities, or even significant losses if you are trying to place an order.

 Although not specifically related to choosing a broker, this is an appropriate time to mention the importance of having up to date technology. You should have decent modern equipment and a reliable internet connection if you are going to be trading options online.

Trading Platform & Ease of Use

Options trading is complex enough already without the added complications of using an online broker that has a trading platform which is hard to use. The last thing you want to do is have to spend any extra time figuring out how to find the information you are looking for or going through an arduous process for placing your orders. You really want to be using a broker that has a user friendly interface, a simple ordering procedure, and other features that help with overall functionality.

If you are specifically looking for a broker that meets these criteria, you may be interested in our recommendations for Options Brokers with the Best Trading Platforms.

Security Measures

If you have an account with an online broker and you have your own money lodged with them, you want to be confident that your account is secure and not liable to be hacked. Unfortunately, that is a modern day risk that comes with using online technology to make financial transactions. The top online brokers use the latest security measures to ensure that they are completely protected from outside interference and that your account and any private details that you provide remain safe at all times.

Reputation

The best online brokers will generally have built up strong reputations for themselves and have strong track records of providing high quality service to their customers. If you stick to using those that have good reputations then the chances are very high that you will have a positive experience.

Before you open an account with anyone, you might consider doing an internet search and seeing if there is negative feedback about them anywhere online. Alternatively, you should make sure that you only sign up with a company that comes recommended by a reputable source, such as the online brokers that we list on this site. We are very particular about the recommendations we make to our readers and only list those that have a strong reputation.

Customer Support

Although you would hope that everything goes smoothly at all times, the chances are that you will encounter some technical difficulties or issues of some kind at one point or another. This is why the level of customer support offered by a broker is also a factor worth taking into account. If you are using a decent one then any problems will probably be few and far between, but they will still happen occasionally and it's nice to know that there is decent customer support available to give you some assistance when you need it.

Additional Considerations

The above mentioned factors are probably the most important, but there are some additional considerations that are also worth taking into account. For example, your trading plan might be based entirely on trading options but there may be the odd occasion when you want to diversify and invest in other financial instruments. If you think this is probable, then you need to be looking at brokers that are also suitable for buying and selling other financial instruments.

You might also want to think about what alternatives are available if you are unable to make your trades online. If you need to make a trade but don’t have access to the internet, then you would want an alternative way of placing orders.  If this is something that you think could be an issue for you then you should be considering brokers that offer other ways to make trades and communicate.

There are also a couple of financial related considerations. Something that might be particularly relevant for beginner traders is the minimum amount of deposit required. A number of online brokers have high minimum deposit amounts, and if you are planning on starting with a relatively low starting capital then this could be a problem for you. You should check out what the minimum deposit is before signing up anywhere, and ensure that it's a suitable amount for your own budget.

The other financial related consideration is what incentives might be available. Because there are so many online brokers around, the market place has become very competitive and brokers are always trying new perks to attract more customers. One way they do this is by offering traders incentives for signing up with them.

Such incentives can include reduced or free commissions for a period of time or some free funds added to your first deposit.  A little bit of free money isn't enough reason by itself to choose a particular broker unless they also meet most of your other requirements, but if you are struggling to choose between two brokers then going with the one with the best sign up offer isn't a bad way to decide. Be aware, though, that these incentives usually come with certain terms and conditions so you should make sure you know what commitments you have to make.

The final factor that you may need to take into account is the trading levels that are available to you.  Whether or not this is relevant to you largely depends on exactly how you plan on using options contracts. If you only plan on using options as part of a hedging strategy, to protect an existing portfolio, then trading levels won't really be relevant to you.

Pretty much every online broker will allow you to write call options or buy put options on underlying securities that you already own because, you aren't really taking any additional risk, but merely hedging against your securities falling in value. However, if you plan on using options speculatively without owning the relevant underlying security, then trading levels will be an issue for you.

If you only plan on buying options with a view to exercising or selling them for a profit, then most brokers will also allow you to do that, providing you have the funds to do so. If you are using strategies that involve writing options and therefore options margin, then trading levels are something you need to consider.

When you sign up with an options broker, they will carry out a risk assessment to determine what level of risk is suitable for you, and your account will then be assigned a certain trading level. This will essentially stipulate the appropriate level of options margin and to some extent will effect what strategies you can use. Therefore, if you are planning on using some of the more complex strategies that require options margin, you need to look at what the requirements are of an online broker for being assigned the trading level that you need.