Choosing a Broker

My purpose here is to educate you, the retail investor/trader. I strongly believe in the power of a knowledgeable individual to make the right investment decisions as opposed to letting some "expert" do it for you. And I emphasize the power of options to add insurance and give greater leverage to the average portfolio.

This means that a good broker is essential. Both in terms of cost and efficiency. I am not going to name names here. It's not my place to advise this or that firm. My purpose is to educate. So, here's what you should look for in a broker.

Cost. This one is obvious. Your cost of entry and exit should be low. Watch out for hidden fees, however. There shouldn't be any account maintenance fees. Your per contract cost should be low and beware of minimum transaction fees. Also, be sure you know the exercise and assignment fees as well as transaction costs.

Margin. If a broker requires you to put up more money for a trade than you can lose, switch firms. For instance, if you pay 2 for a 10 point vertical spread, you should never have to put up more than 2 because that is all you can lose. Make sure you know what the debit interest is on any trades you do on margin. You should also receive interest on any credit balance.

Trading Platform. The trading platform should be user friendly and reliable. You should also be able to cancel all outstanding orders at the touch of a button in case something happens. There should be a reliable  and easily available customer service center. A few years ago when I was trading actively online a local power failure left me with open orders and no way to trade. It was difficult for me to get through to someone at the firm to cancel my orders. Which, Murphy's Law being what it is, cost me a lot of money. You should be able to enter multi-legged orders. Not just simple vertical spreads but complex orders such as butterflies and iron condors. The platform should also clearly show, in the form of a P&L graph, what you can make or lose. A good platform will also let you adjust the variables. Not just price, but also time and volatility.

If you are a client of a good firm with a superior trading platform and, armed with the proper knowledge (ahem), there is no reason that you can't make all your own investment decisions.

Remember, “A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.” -Burton Malkiel, author of A Random Walk Down Wall Street