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.

For Perspective

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).
• Commissions.
• 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.

Commissions

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.

Trading Platform

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.

Naming Names

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)
• TradeKing (now owned by Ally)

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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Lee Finberg
Options Income Specialist –
Small Risk. Big rewards.

Note: We can – and do – guarantee your satisfaction with “The Monthly Income Machine” detailed how-to blueprint for conservative income investors. No one, however, can guarantee market profits. For a full description of the risks associated with such investments, see Disclaimers.