Options-Friendly Brokerage: It’s Not Just What You Do; Where You Do it Matters… a Lot!
The information that follows will definitely mean a great deal to you in terms of your Return on Investment (ROI), especially if you are using The Monthly Income Machine™ credit spread strategy and/or my conservative enhanced-return strategies for stocks you already own.
The purpose of SaferTrader.com is to help investors wanting monthly income to acquire it successfully, reliably, and safely. I concluded, after more than 30 years as a financial advisor, educator, broker, and investor that there is indeed a “single best investment technique for seeking monthly income,” and it is now the only technique I use in my own accounts.
The Possible Brokerage Firm Problem
Many of you using the “Machine,” as well as those of you who are not doing so at this time but are employing some form of option credit spreads as an investment vehicle, may be leaving too much money on the table if your account is not housed at an options-friendly brokerage firm.
Because the Monthly Income Machine technique employs options in a very special way (hint: we don’t “buy” options – a historically proven approach for losing money), the brokerage firm at which you house your account is very important.
And I’m not just talking about commissions, although they are a significant consideration. There are other considerations that may be even more important; one in particular is critical.
Defining an Options-Friendly Brokerage Firm… and Naming Names
These are the criteria – listed in order of importance as I see them – that make a brokerage “options-friendly.”
And let’s be clear, if your brokerage is not options-friendly, it is almost certainly costing you money!
- Margin policy (CRITICAL).
- Online Trading Platform (user-friendliness for order entry, live price and news data, in-depth analytical resources, training material, account status information, etc.).
- Options-Knowledgeable People (on the other end of the line when you call to place a trade by phone or have a question or a problem).
- Prompt Reply to E-mails or Phone Calls.
- Same commission for telephone and online orders.
- Absence of “inactivity fees.”
- Practice Accounts – to familiarize investor with the online platform, and for practice trades without risking any actual money.
Note: An options-friendly brokerage should also meet the criteria enumerated above that are relevant for stock orders as well. Criteria for stock trading are not on the above “list” because firms that meet the options criteria will almost always meet the relevant criteria for stock trades too.
Some of these criteria warrant further elaboration.
Margin Policy re: Iron Condors
Yes, this puppy is definitely critical. Specifically, we’re talking about how the brokerage firm treats the Iron Condor – a type of trade that is often an important component of The Monthly Income Machine. The condor involves placing both a Bear Call Spread and a Bull Put Spread on the same index, stock, or ETF.
Thus, there are two credit spreads involved in the trade. We don’t need to deal with the specific intricacies of Iron Condors here. What matters, as you will see, is how the brokerage firm treats the two sides of the trade with respect to margin requirement.
An options UN-friendly brokerage demands that you employ margin for both sides of the trade.
An options-friendly brokerage, on the other hand, recognizes the fact that it’s absolutely impossible for the underlying stock to wind up in-the-money at both sides of the trade on options expiration day. (Basic physics: you can’t be in two places at the same time.) Accordingly, at an options-friendly firm you only need to have margin coverage for one side of the trade.
Why is this critical? Because if the firm requires two margins, it cuts your rate of return, i.e.. your return on investment, in half!
Therefore, if the brokerage firm requires margin on both sides of the trade, I immediately disqualify it from consideration as my broker. I would not even bother to see how such a firm qualifies on the rest of the criteria on the list.
This can vary widely depending on the brokerage firm. I wouldn’t pay more than $2.00/option. Also, if they hit you with a “fee” if you are not trading enough to suit them (a so-called inactivity fee), they are out of the picture as far as I am concerned.
My impression is that most major brokerages have pretty darn good online trading facilities. The problem arises if they charge extra for real-time quotes, charts, or other resources I feel should be covered by the commission I pay, rather than being a costly add-on.
First, let me emphasize that the preceding, and the following, represent my opinion and are based on what I believe to be accurate information at the time of this writing. I cannot guarantee that there are not other brokerage firms that are as good as the ones I recommend.
And, of course, policies and facilities change over time. You can, and should, check out the firm you are with now, or are considering, before moving your account or opening a new one.
These four meet the criteria for options-friendliness, the last time I checked. You cannot go wrong with any of them.
- OptionsXpress (became part of Schwab in early 2018)
- Think Or Swim (now part of TD Ameritrade)
- Interactive Brokers (may be lowest commissions)
- OptionsHouse (now owned by E-trade)
As I said earlier, there may well be others that meet the options-friendly criteria.
Amazingly, many very well respected firms, whose stellar reputations are based on other instruments of the investment world, are decidedly options-UNfriendly. This includes the two Wall Street giants I once worked for.
Meanwhile, let me hear from you regarding your own prior experience – positive or otherwise – in dealing with options activities at your brokerage firm. I’ll see that it’s shared with the SaferTrader community at the website.
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Options Income Specialist –
Small Risk. Big rewards.
Author & Creator of “The Monthly Income Machine™”
Email contact: Lee@SaferTrader.com
Came across the article by chance and now considering signing up for monthly newsletter. My question here is about the so called free trading platforms like Robinhood, WeBull and Public. Do you recommend these platforms for credit spreads, and can are they user friendly for entering iron condors and other credit spreads?
Thinkorswim presently charges $6.95 plus $.75/contract. Thus, if I do my usual 10 contracts, it costs me $14.95 for one trade. Is this still considered cost effective for Trading Iron Condors?
Such a wonderful blog you have shared. it is really very helpful for everyone. Thanks for sharing with us.
Now that OptionsXpress has been acquired by Schwab and ToS by TD Ameritrade, are they still options-friendly for iron condors? Or would IB be the only one left that is still options-friendly?
Due to work requirements, I work at a big discount broker (Fidelity); As they aren’t option friendly, does this system not work in this case. I am required to hold accounts here. Thank you!
The “The Monthly Income Machine” technique for generating recurring option income does not depend on the investor’s choice of brokerage firm; it can be employed with an account at any firm.
The issue of options-friendly relates to how efficiently the investor can work with his brokerage firm.
For example, option-friendly firms have easy to use platforms for order entry, provide a complete range of option chain and other needed data, properly require only margin on one spread of an Iron Condor, enable stop loss orders to be placed on the net premium of a spread rather than requiring separate stop loss orders on the short and long strike price options comprising the spread, etc.
Consequently, where possible we recommend that the investor use an options-friendly firm for his options accounts. But it is certainly feasible to use any brokerage that deals with stocks and options.
I’m using interactive brokers now. Yes, c omissions are low, but you get your money’s worth. I am primarily trading options, but it has taken me a while to get a grasp on their user interface. It really is set up for professionals wanting to place more complex strategies. I am still not confident I will continue using them, as other more friendlier systems can be used.
And I can attest to the monthly inactivity fee. That sucks!
Can I ask what minimum account balance Interactive Brokers offered you? I spoke with them yesterday and they said the minimum balance would be $100,000 if I wanted the option of a margin requirement on only one side of an iron condor. That minimum account balance seems high to me. Thanks.
There must have been some sort of miscommunication. To my knowledge neither Interactive Brokers nor anyone else would have a minimum account size requirement of $100,000 for doing credit spreads.
Suggest you call them back and ask what is the minimum account size for an investor who will be doing option credit spreads.
I am wondering if you have an opinion of Tastyworks, run by Tom Sosnoff.
Tastyworks is incredible for options. Great commissions, tons of information/education and Tom Sosnoff is the best. I have been with Thinkorswim since 2001 and use both TOS and Tastyworks.
First off, I want to compliment you on the Monthly Income Machine book. As someone who’s new to trading spreads, it’s become a very helpful resource.
Regarding options-friendly brokers, I’m curious if Interactive Brokers would make your list. They have the lowest commissions, but do you know what their margin policy is?
The last time I checked, Interactive Brokers correctly (in terms of my “rules” for option-friendliness) did establish a margin requirement for only one side of an Iron Condor. This is a VERY important consideration. One negative to IB, again unless their policy has changed, is that they charge a hefty “inactivity” fee in any month the investor does not trade.