How to Choose the Best Options Brokerage

With the stock market’s volatility and unpredictability, it can be difficult to make educated trades that bring in a steady long-term profit. For those who are new investors or traders looking for alternatives that involve lower risk and return more consistent yields, options trading may be just the solution — if you know how it works. In addition to familiarizing yourself with options, you’ll want to make sure you research the best options brokerages. 

What are Options and How do They Work?

Trading options is a powerful investment tool that allows traders to capitalize on their ability to predict short-term market movements. There are two primary types of options: calls and puts. A call option gives the trader the right, but not the obligation, to purchase an asset at a set price before or on an expiration date. A put option grants the trader the right to sell the asset at a given price before an expiration date. Essentially, these tools allow traders to bet on whether prices of certain assets will move up or down within certain time frames so they can make money without having to actually buy or sell those stocks or other financial instruments that would be much costlier.

What is an Options Brokerage?

An options brokerage is a firm that specializes in offering services related to options trading such as providing access to different exchanges, research and analysis tools and order-entry platforms. 

3 Types of Options Brokers

Deciding on the right options brokerage is a critical step to take when creating a well-rounded investment portfolio. When it comes to choosing between the three main types of brokers — full service, online and discount — you’ll want to evaluate each one in order to select the best option for your portfolio and investment style. 

Full-Service Brokerage

Full-service brokerages offer clients personalized service and guidance from experienced brokers; they are typically best suited for large-scale investments. Additional services typically include portfolio analysis, tax advice and estate planning. These brokerages charge around $150 per transaction.

Online Brokerage

For investors seeking more hands-on knowledge, an online brokerage often equips them with the tools they need to manage their own accounts without the aid of a personal financial broker. Online brokerages with automated trading options gives you control. 

You’ll want to make sure you go with one that is straightforward and easy to use. Customer support is also important in case any issues arise. 

Discount Brokerage

A discount brokerage provides access to a library of research tools at lower rates than full-service brokerages. These are most suitable for those who prefer making their own investment decisions but don't want to or can't pay higher fees than necessary.

What is a Broker's Role in Options Trading?

An options broker is an individual or firm that provides access to the options market for retail investors. They offer traders the ability to make markets and execute orders for customers who wish to buy or sell options contracts, either on a listed exchange or on a private basis. Options brokers typically have specific responsibilities such as gathering quotes and prices from exchanges, informing clients of option movements, designing strategies that maximize risk/reward objectives and setting appropriate margin levels. Options brokers also provide trading advice and guidance as well as detailed market information related to derivatives instruments. A quality options broker should be knowledgeable in basic options theory and familiar with the brokerage functions available in today's highly automated markets. 

Choosing the right broker is key if you want to trade options. Although any broker can help you buy or sell stocks, not every broker has the knowledge and resources necessary to assist their clients in setting options-based investment strategies. 

The wrong broker could end up costing you money. 

Choosing the Best Options Brokerage

Choosing an options brokerage requires assessing your specific needs and goals as an investor so you can determine what type of brokerage will be the most useful and beneficial in achieving your objectives. 

What Type of Trader You Are

You’ll need to ask yourself, “What type of trader am I?” to find a brokerage that really meets your needs. The types of traders involved with options vary widely and include both aggressive and conservative investors. Aggressive traders are often more inclined to take greater risks, while conservative traders will typically employ strategies with a lower risk profile. 

When selecting an options strategy, your risk appetite should be carefully considered as the most successful strategies will align well with your personal risk comfort level. For example, traders with a higher risk appetite might opt for covered call writing or straddles, while those with a more conservative mindset might look to buy protective put combinations or married puts. 

Transaction Fees

Examine the brokerage fees and commission structure. This will include any upfront fees or ongoing costs associated with maintaining an account or conducting trades. These can also vary greatly depending on the brokerage and the services offered. Some online brokerages charge no per-contract fees and low-cost, flat commission rates.

Portfolio Margining

Portfolio margining is used by some experienced traders with well-diversified portfolios who are risk hedgers and use options as part of their overall trading strategy. It can translate to more buying power and can help create more opportunities for diversification or act as a buffer when markets become volatile. If this is something you’re interested in, make sure you check whether the brokerage offers a margin account. 

Education Offerings

Some brokerages provide various educational services that are great for beginners. These include webinars, tutorials, seminars and one-on-one coaching sessions with experienced brokers. These educational services provided by brokerages are ideal for those new to trading because they provide an easy way to understand the ins and outs of the markets without having to spend too much time researching on your own. Many times these services also include virtual accounts where you can practice executing trades without risk before putting real money into play. 

How to Open a Brokerage Account

• Step 1: Research different online brokerage accounts and decide which one is right for you. Consider any fees, services offered and financial ratings that the broker may have. 
• Step 2: Visit the website of the selected online brokerage account and read through their terms and conditions thoroughly to make sure you understand everything before signing up.
• Step 3: Create an account by entering your personal information such as name, address, phone number, email address, Social Security number (SSN) and date of birth.
• Step 4: Submit all required documents — like a valid government-issued ID card, passport, utility bill or bank statement in your name — to verify your identity as well as your home address. 
• Step 5: Select your investment preferences such as investment goals, risk tolerance level and other preferences like whether you'd prefer to invest in stocks or mutual funds. 
• Step 6: Fund your account with money from a linked external bank account using automated clearing house (ACH) transfers or debit/credit cards. You can also initiate paper check deposits, depending on the online broker's policy. 
• Step 7: Once your funds are available in the account, you can start trading by selecting stocks, bonds or other securities to build up a diversified portfolio that meets your goals and risk/return tradeoffs. 
• Step 8: Monitor your investments regularly so you can make adjustments to ensure it continues to meet your objectives over time. It’s important to pay attention to changes in market conditions and react accordingly with timely portfolio rebalancing when needed. 
• Step 9: Consider taking advantage of additional features offered by some online brokers such as educational resources and automated trading systems designed to help improve their performance over time.

Your Options Brokerage Matters

Options trading is an important form of investing that can be both a lucrative and risky venture, so it's important to choose the right brokerage. An online brokerage can provide you with access to even more options analysis tools and strategies, helping you make informed decisions while minimizing your risk. If you're new to options, you'll want to look for a brokerage that provides educational resources to help you gain a better understanding of the complexities of options trading. It's also wise to look for a brokerage that offers competitive commission pricing and automated trading options.

Frequently Asked Questions