Like many people, I was intimidated by options when I first started investing almost 10 years ago. They seemed complicated, because they are. It soon became obvious, however, that locking in the ability to buy or sell securities at a set price would be a powerful way to tap into good investment ideas I might not otherwise be able to afford. Through the years, I’ve discovered that all of the best options brokers share a few things in common: low fees, no account minimums, and a user-friendly interface. In this article, I’m going to walk you through the three best options brokers out there, and how they’ll be able to help you with your own investment strategy.
If you’re just getting started in options, TD Ameritrade offers the most educational resources to help you make smart decisions early on. If you already have a firm handle on your investment strategy and want to maximize your profits, there’s no cheaper online options broker than OptionsHouse. If you’re an active trader that’s looking to stay on top of daily trading volume trends or hourly changes in a stock’s chart, OptionsXpress is going to give you the most effective tools to do it. Each of these brokers caters to a different type of investor, but they all share a focus on low fees, no account minimums, and a user-friendly interface.
The Simple Dollar’s Top Picks for the Best Options Brokers
- Best for Beginners: TD Ameritrade
- Lowest Fees for Experienced Traders: Optionshouse
- Best Tools for Active Traders: OptionsXpress
What to Look for in an Options Broker
I have managed my own investments for a decade and use Merrill Edge as my primary trading platform because it’s linked up with all my other accounts. However, as a traditional broker, it’s pretty darn clunky when it comes to researching options. In all honesty, the only reason I stick with Merrill is because I have multiple accounts and enough money invested with them that they grant me some pretty nice perks to keep my business. For those just starting off with options, those with a small account, or those who are very active and need a responsive interface of high quality, an old-school broker like Merrill that has simply bolted on an options trading platform probably isn’t going to be ideal for you.
The good news is that there is a host of brokers out there that cater almost exclusively to options traders. The best have the following things in common:
- An options-specific platform: If you want to be serious about options, you’re going to want a broker that is too. A traditional broker focused mainly on stocks or ETFs can typically be clunky when it comes to researching options, or use a fee structure that doesn’t make active options trading cost effective. The good news is that there are a host of brokers out there that cater almost exclusively to options traders. And that’s because they were built primarily as a platform for options first and foremost – even if some were eventually bought by a larger company, or added tools for other kinds of traders down the road.
- Low fees: Minimizing risk also goes hand-in-hand with minimizing cost. It’s important to acknowledge that even a modest amount of fees will quite literally take the place of other profitable trades you could be making. Whether you’re trading options in the hopes of big profits or just using them for a defensive strategy, cost matters a great deal.
- Low account minimums: Many traders of modest means use options as a cheaper alternative to going long with a high-priced stock. If you have to have a minimum of $100,000 in your account or trade 50 times a month to get cost-effective access to those options, what’s the point? Most options traders can easily get by with a limit of $1,000 or so, but a lack of minimums at all is more preferable.
- Intuitive interface: The given price on an options contract can fluctuate significantly across the trading day. If you have to fumble around with poorly formatted options chains, it can cost you.
- Education: Speaking of multi-leg options trades, when is it right to do a bull call spread? And what the heck is an “iron condor?” A good broker will provide resources to teach you more about the sophisticated option trading strategies you may not be familiar with out of the gate.
- Flexibility: If, like me, your favorite option is a covered call, that means you need to research and purchase plain old stocks and ETFs, too. And you’re not going to want to use another broker to do it. Nobody likes the hassle and cost of having multiple platforms to do multiple things.
The Best Options Brokers
Best for Beginners
If you’re looking to explore options without sacrificing some of the investment options you’re used to, like low-cost ETFs, then TD Ameritrade strikes the perfect balance between worlds – and offers plenty of tips and tricks to help you learn how to trade options effectively, including webinars and an archive of educational videos to explain specific strategies. There’s no element of financial planning you can’t find through TD Ameritrade, which makes it a great one-stop shop, as well as a great entry into options for those more familiar with traditional stocks and bonds.
TD Ameritrade may be a discount brokerage, but it is still one of the largest trading platforms in the world with almost $740 billion assets and almost 7 million client accounts. It has won new business in recent years mostly by catering to rookie traders, winning accolades for its accessibility, including five consecutive awards as the best platform for novices as ranked by respected investing magazine Barron’s.
TD Ameritrade also recently acquired Scottrade with the deal expected to close by fall of 2017. With Scottrade’s numerous customer service awards and brick-and-mortar stores, TD Ameritrade just amped up its market share of investors of all kinds.
Easy-to-Execute Options Trades
When I first started dabbling in options, simply learning the lingo was hard enough. What the heck is a bull call spread? How can I be sure I’m making a covered call on my existing stocks and not accidentally selling shares I want to keep? Thankfully, TD Ameritrade cuts out the guesswork with easy-to-understand options trading tabs. Simply click on the “spread” tab if you want a spread, or click on the “single order” tab if you just want one leg. There’s also clickable links at the ready explaining the strategies on the order page, so you won’t have to find the answers to any last-minute questions elsewhere before placing your trade.
You can make stock trades for $9.99 on the platform, and trade from over 100 commission-free ETFs. There’s also the capability to trade futures and even forex if you really want to get sophisticated, or an avenue to buy annuities if you’re thinking about income in retirement. The fees are admittedly sometimes higher than some other providers – about 10% higher than the typical discount broker, and more than 50% higher than the best discount broker you’ll read about next. But those fees fund customer service resources that are available 24/7, so you’re getting something for that extra money. TD Ameritrade also has over 100 branches across 33 states for in-person consultation if you need it.
As stated, the robust customer service and physical branches are great resources for newbies to options trading. But there’s also plenty of online resources for the self-starter, including both options screeners to help you identify new ideas, as well as hours of webinars and on-demand video to teach you about options strategies. Most importantly, you’ll also be able to learn how to execute those strategies within the TD Ameritrade platform. Reading a blog post is one thing, but seeing someone click through a trade is by far the best way to learn the ropes/
Lowest Fees for Experienced Traders
If you’re looking for the most economical options-specific trading platform, OptionsHouse is the way to go. Whether you’re trading options or stocks or futures, it’s hard to beat its pricing – especially when coupled with its no minimum balance requirements.
In summer 2016, OptionsHouse was acquired by megabroker E*Trade Financial. That should tell you two things – first, that E*Trade clearly understood it had to get with the times on options, and secondly that OptionsHouse was one of the most attractive platforms out there at the time.
E*Trade could eventually integrate more with OptionsHouse to bolster its existing tools and research, and I’m interested to see how things progress in this partnership. But regardless of better tools down the road, one important thing to know about the present is that there will be no change to the existing low-cost structure that has made OptionsHouse so popular.
That means you can depend on the low-cost platform that has made OptionsHouse such a hit with experienced traders who might not need the additional educational resources provided by other higher-cost brokerages, like TD Ameritrade.
A single-leg options contract is $5.45 all-in. That is the lowest rate I could find anywhere right now. But the low prices also extend to futures and stock trades as well, allowing you to manage your entire portfolio in a very cost-effective way. There’s also no minimum balance, making it really easy for even small-time traders to get started. If you’re trading hundreds or thousands of options contracts each month, there may be a few premium services that charge lower commissions thanks to a volume discount, but for the majority of options traders, this will be the absolute cheapest option available.
A custom trading interface provides real-time market data and speedy execution to make sure you are making the most of what the market gives you. The design is clean, and there’s tons of information at your fingertips without cluttering up your screen. The platform is very intuitive, but if you do have a question, you’ll quickly find answers in the robust tutorials for new users. The interface also has been seamlessly ported for mobile devices, with iconic investment magazine Barron’s giving OptionsHouse a perfect 5.0 score on its mobile experience in its 2016 broker rankings.
User-Friendly Risk Management
The OptionsHouse tradeLAB tool offers one of the most user-friendly tools I’ve seen to dissect options spreads. There is a green smiley face besides the statistical probability of making a profit, and a red frowny face showing your probability of a loss – so no need to decipher any weird calculations here. You’ll also get other important information at a glance, any upcoming earnings reports or dividend distribution dates, in addition to expiration. Figuring out the potential performance of your options over time can be tricky, and OptionsHouse takes a lot of headaches out of the process with tradeLAB.
Best for Active Traders
I mentioned the potential of better tools at OptionsHouse down the road because five years ago we saw a case study in how a big broker can really turn up the juice on a smaller options platform. And the result is the current OptionsXpress platform, which is unrivaled in its tools and research.
If you’re an active trader, tools are like food and water to you. While casual or beginner traders looking months down the road may not need to stay on top of daily trading volume trends or hourly changes in a stock’s chart, active options traders can’t live without that info – and OptionsXpress knows this.
OptionsXpress was purchased by Charles Schwab in 2011 as a way to improve the legacy broker’s offerings for traders. Since then, the marriage has resulted in the best of both worlds – the slick, professional feel of a big-time firm, along with the agility of an options-native platform.
The icing on the cake for OptionsXpress is the ability to trade stocks, ETFs, and even futures alongside options, giving active traders a one-stop shop to make the most of their investing ideas.
From its attractive charting interface and its Idea Hub that helps you browse market trends, to its exclusive automatic execution tool, Walk Limit, which helps you place orders at the best price, Options Xpress has the best toys in the space. Everything down to the trade tickets are easy to understand at a glance. To help you keep growing as a trader, there are also weekly webinars, an archive of on-demand educational videos, and regular email updates via its daily Options Xpresso email blasts to keep you focused on market risks and opportunities. There’s even an interface to help you practice trading without investing any real money, as a way to test your options trades in real time without any financial risk. I could go on, but you get the idea – there are plenty of tools for investors of every strategy and style, whether you’re playing a long-term trade or moving quickly in and out of positions.
Free Broker Assistance
Any time you need help, licensed options brokers are available to help you at no-additional cost. That can provide much-needed peace of mind for rookies, or help unwind a complex strategy for seasoned traders who may find themselves in a bind. You can even get advice on futures and ETFs if you want. Between this access and the tools, there’s literally no strategy you can’t handle with OptionsXpress.
Active Trader Discounts
Standard options rates are admittedly a bit pricey using OptionsXpress, but active investors who book at least 35 trades per quarter will qualify for a volume discount of as little as $1.25 per contract when booked in groups of 10 or more. There’s also a discount for contracts trading for less than 5 cents, with so-called “penny options” costing a $4.95 flat rate, or 50 cents in lots of 10 or more. That makes it much more cost-effective to bid on way out-of-the-money options. You won’t be able to top OptionsHouse on pricing, of course, but you will certainly save over most of the competitors out there if you trade in lots of 10 or more.
A Word On Options Expiration and Alerts
Options can be very profitable if done right, but I’d like to use this space for a public service announcement: Options are contracts that must be acted on, or they expire worthless. That means making sure you have a good grasp of your specific option expirations, and that may mean finding out how to set reminders or alerts via your broker.
It is not uncommon for less vigilant or inexperienced options investors to just throw up their hands and eat a bad trade. But, remember: sometimes it’s financially advantageous to close an option position early, or to close an option at a smaller loss than allowing it to execute.
Let’s say you spent $100 to for an options contract that gives you the right to buy 1000 shares of XYZ Corp. at $10 a share, and the contract expires in two months. Your hope is that shares will rise to $12 so you can buy 1000 shares at $10 per your option contract and then immediately sell them at $12 for a $2,000 gain.
Unfortunately, some bad news in a week or two pushes XYZ down to $8 a share – meaning you’re deeply “out of the money” and buying at $10 would result in a $2,000 loss instead.
Again, the great thing about options is that you don’t have to buy those shares at $10 if you don’t want to, and can just let the contract expire. You’re out $100, but that’s better than a $2,000 loss.
However, you could also sell that options contract to someone else instead of waiting until expiration. They probably will give you a fraction of what you paid since the options are pretty unattractive, maybe only $5 or $10. But hey, it’s better than zero.
Your personal strategy and specific trades are up to you, but all options traders run into scenarios like this eventually and many just throw up their hands and give up. Believe me, over time that extra $5 or $10 you salvage from seemingly worthless options will add up; particularly if you’re an active trader.
To this end, I highly recommend emails, text alerts, or calendar reminders to let you know when your options are set to expire. Whatever your broker, spend some time exploring the tools they provide to help, and find a system that works for you.
TD Ameritrade, OptionsHouse, and OptionsXpress are the best options brokers currently available, because they all meet the criteria for cost-effectiveness, quality research tools, and having a smooth user interface. While TD Ameritrade isn’t the cheapest broker to place individual options trades through, it’s reasonably priced and has a $0 minimum balance, robust customer service, and educational resources that are extremely helpful for beginning options traders to get started. If you’re looking for the best platform for active traders, I highly recommend the slick interface of OptionsXpress. If you are more interested in cost-effectiveness over tools, go with OptionsHouse.