Do You Really Know What You are Paying for Your Options Trades?
By - Dan Raju, CEO at Tradier on
Jan 13, 2021 at 10:04:28 AM
The goal of trading is of course: to build a strong financial portfolio while generating income. But, how much are you paying per trade? In most investing platforms, every trade requires a commission that can eat into your profits. Per-trade commissions can also make risk assessments more difficult. Let’s take a look at the true cost of options trading — and how you can improve your profits.
The Cost of Traditional Options Trading
For years, investors have relied on brokers to recommend trades and conduct their transactions. The brokers receive a commission in exchange for their expertise. In fully managed brokerage or for high-risk trades, the additional fee makes sense. While many trading platforms have removed commission fees for stock and ETF trading, most still charge fees on options trades. Because many options traders don’t work with separate brokers, they may not be noticing the fees stack up.
This is because traders and investors have been trained to pay per-contract fees and ticket charges by the legacy brokers, so they’re numb to the fees — or they think of commissions as a cost of doing business. However, if you do a lot of options trading, you could be sacrificing profits or even making poor trade decisions due to the costs.
Why You Need to Lower Your Trading Costs
If you overpay commissions on options trades, you can make a profitable trade unprofitable just by the sheer nature of the expenses being too large. When you actually pay attention to standard costs, you realize how much you’re paying. You may be paying contract fees, per-trade commissions, or both. Other standards fees, such as exchange fees and regulatory fees, may be passed through to you by your broker.
Reducing your cost to trade directly increases the profit left in your pocket and allows you to make better risk decisions. You may not necessarily need to make more trades, but you’ll certainly be ready to take action on low-risk, high-reward opportunities.
The New Way to Trade
With the debut of online investing platforms such as Robinhood and Tradier, more brokers are offering commission-free trading. There has been a major shift toward subscription pricing a la Netflix, in which you pay a single monthly fee and enjoy unlimited trades. Robinhood has inspired many established brokerage forms such as E*Trade to reduce or eliminate their commissions. However, it’s worth noting that most still charge per-contract fees for options, and Robinhood also does not offer mutual funds or bonds.
If you’re a frequent trader, you’ll want to minimize your per-trade and per-contract fees as much as possible. This allows you more flexibility to make wise investment decisions and strike while the iron is hot. Even if you’re not a frequent trader, you’ll probably find that subscription-based trading gives you that peace of mind — and more money in your pocket. Look for a platform where you can conduct all your investing, including stocks, bonds, and ETFs.
If you’re not sure how much you’re currently paying for commissions, open up your monthly confirmations and take a look. You may find that these fees are cutting into your profits. If you’d like better flexibility and risk assessment for options trading, start investing like you watch Netflix — with a subscription-based brokerage solution like Tradier.