Where to Trade Options
One of the first things you need to plan when you are getting ready to trade options is exactly how you are going to make your trades i.e. where will you buy, sell, and write options. Most options contracts are bought and sold on various options exchanges based around the world. These exchanges are easily accessible to the general public, but you cannot actually carry out the transactions yourself. In the same way you need the services of a stock broker to buy and sell stocks on the world’s stock exchanges, you need a broker to buy and sell options.
On this page we explain a little more about using brokers to trade options. We also look at the two main ways in which brokers can be classified: full service or discount, and online or offline.
Using a Broker To Trade Options
Most stock brokers will carry out options trades on your behalf, and there are also specialist options brokers who focus specifically on this particular financial instrument. Using a broker to trade options is very simple: you just have to instruct them as to what trade you wish to carry out and they will execute the transaction for you. In return, they will charge you a commission for each transaction, usually based on the size of the trade involved.
There is a range of different orders you can place with a broker, and these orders can be used to buy contracts, sell existing contracts that you already own, and write new contracts to sell. There are also certain stipulations you can make as part of your orders: such as minimum or maximum prices to trade at.
Choosing a broker to use for trading options can actually be a difficult decision, because there are so many of them. If you already make investments, in stocks and shares for example, then you already have an account with a broker that can also be used to trade options. Alternatively, if you have friends or family members that you know use a broker then you may wish to ask them for a recommendation.
However, if you are completely new to investing, knowing which broker to use is really not that easy. You may wish to read our page on Choosing a Broker for further advice on this subject.
Full Service Brokers and Discount Brokers
The two main types of brokers are full service brokers and discount brokers. The differences between the two are essentially in the services that they offer and the fees and commissions that they charge. Full service brokers are typically the more expensive of the two, because you will have a personal contact that will work with you on your investments.
A good full service broker will take the time to understand your personal circumstances and your investment objectives, and then offer advice and guidance on what investments you should be making. Through a combination of knowing what you are trying to achieve and their own knowledge and expertise, they should be able to help you reach your investment goals.
As you can imagine, you do pay a premium for this level of service. If you use a full service broker, then you will usually pay fairly high commissions on all your transactions, and you may be subject to monthly or annual fees too.
Discount brokers, as the name suggests, are usually cheaper and they offer discounted commissions and fees. You will generally pay significantly less commission for each transaction that you make and other fees will be kept to a minimum. However, you will not benefit from having a professional assist you with your investments. A discount broker is essentially there to take your orders and execute them accordingly.
If you have very little investment experience, then the advantages of a full service broker are fairly clear. However, the extra costs involved shouldn't be ignored. If you are trading with relatively little starting capital then using a full service broker could seriously impact upon your profits. Also, if you plan on being reasonably active in your options trading then it may not be practical to seek advice before every trade that you can make and, of course, the more trades you are making the more impact the higher commissions will have.
As a very general rule, we would advise that discount brokers are the better choice for options traders. You can read more about the comparisons between these two types of brokers on the following page – Full Service Brokers vs Discount Brokers.
Online Brokers and Offline Brokers
In the past, an investor’s relationship with their broker would usually have been a relatively personal one. It was quite normal for investors, particularly regular investors, and their brokers to know each other reasonably well. The most common way for investors to place orders with their broker would be over the telephone, and there was plenty of personal interaction. While there are many investors these days that still have such relationships with their brokers, the use of online brokers is becoming increasingly widespread.
Online brokers are typically discount brokers, so if you would prefer to use a full service broker you may be better off using an offline broker that you can talk to over the telephone. However, if keeping fees and commissions low is a priority for you, then an online broker is almost certainly the best choice for you. For most options traders, we would suggest that using an online broker is very much the way to go, for a number of reasons.
The first reason we have already mentioned; the cost savings can be quite substantial when using an online broker because you will typically pay much less commission on each transaction you make. There will generally be less to pay in the way of other account fees too, unless you specifically want access to the various tools and additional services that some online brokers make available at a cost. The second reason is the ease of making trades. Using an online broker is incredibly simple once you get used to the trading platform, and placing options orders is normally just a matter of making a few clicks of the mouse.
If you are going to be relatively active when trading options, then the ability to place orders quickly is a huge advantage. If you are using a day trading style, then a few minutes difference in getting your orders placed and transacted can sometimes be the difference between making money on a trade and losing money. Even if you aren't particularly active and only trade occasionally, the advantages of using an online broker probably make this a better choice than using an offline broker.
Please note, in our Best Options Brokers section we make recommendations for the top online brokers in a number of different categories.