Published in: Buying Stocks | Feb. 20, 2019
5 Things to Look For in an Options Broker
By: Dan Caplinger
Trading options can be complicated. That's why you need a brokerage company that'll give you the guidance and support you need to be successful.
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Brokerage accounts are vital for investors looking to make money in the stock market. But stocks aren't the only investment that's available to brokerage customers. Increasingly, many investors are turning to options trading as a way to manage risk and use leverage in the hopes of boosting their returns.
If you want to be smart about options, then picking the right broker becomes crucial. Any broker can help you buy and sell stocks, but not every brokerage company has the experience and tools to help their clients set up and execute options-based investment strategies. With that in mind, here are some things that you'll want to look for when you're searching for the best options broker.
1. Tools to assess options strategies
Evaluating options involves different kinds of work than picking stocks. Even once you've focused on a particular stock, choosing options on that stock requires looking at measures of market and individual-stock volatility, interest rates, and trading behavior in order to come up with the strategies that are most likely to be successful. The math alone can be extremely tricky, and mistakes can be costly.
The best options brokers have tools to help you evaluate which options are most suitable for a particular strategy. By providing access to historical market data, analytical platforms, and other capabilities, good options brokers allow their clients to make smarter decisions when they invest their money in the options strategies that they've developed.
2. A trading platform that works with your strategy
There are many different ways to trade options. Some people simply buy or sell single options on a particular stock, counting on the market moving in the proper direction for those positions to be profitable. However, some options strategies involve buying or selling combinations of different options all at the same time. Coordinating the implementation of these strategies is almost impossible unless your options broker provides a platform that lets you enter such trades as a single unit.
Given how complicated options trading can be, the best trading platforms have simple interfaces that make it easy to understand exactly what you're doing while avoiding unnecessary errors. As long as you're comfortable with the trading platform and can use it effectively, then you should be happy with your options broker.
3. Make sure your broker's customer service reps know options
As much as you might hope to do transactions solely through internet-based platforms, there'll inevitably come a time when you need to talk directly to a customer service representative. When that happens, you'll need an experienced person who knows what they're talking about.
Unfortunately, for many brokerage companies, options are an afterthought, and regular customer service reps don't understand options well enough to communicate effectively. Even if you don't go with a broker that specializes in options, make sure your chosen brokerage company has options specialists on staff that you can talk with when you need them.
4. Don't get ripped off
Commissions on options trading can be a lot higher than stock commissions, so it's important not to assume that a low-priced broker with stocks will be equally suited for options traders. Sometimes, you'll have to dig through the fine print even to find options commissions.
That said, in some cases, higher commissions are worth the price if it gets you high-quality service. In particular, most options markets are a lot less liquid than the markets for individual stocks, and so if paying a few extra dollars in commission gets you an execution that saves you hundreds of dollars compared to what a less experienced broker would obtain, it's worth the cost.
5. Get trained on options
Finally, some brokers are better than others at providing educational materials about options. Every company is required to give you disclosure documents from the Options Clearing Commission, but some add their own take on options trading.
Guidance and support on options can take many forms, so it's important to get a broker that'll give you what you need the way you want it. A good combination of online webinars and customer service specialists can give you what you need to be a more effective options investor.
Find the best broker you can
To trade options well, you need a good team. By choosing a great options broker, you'll be in a much better position to make the most of the opportunities that options can give you in your investment portfolio.
Using the wrong broker could cost you serious money
Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.