My IRA: goodbye Fidelity, hello ThinkOrSwim

October 3rd, 2009 · 4 Comments

As you might gather from reading this blog, I’ve been doing lots of research into options and options trading strategies.  I’ve just recently decided that it was time to position myself for the next step:  putting what I’ve learned into use on more of my family’s investments.  A large chunk of our portfolio is in Fidelity IRAs, so for me, this meant completing the paperwork to move over to one of them to a ThinkOrSwim IRA.

Thinking about swimming

Thinking about swimming

In my earlier, uneducated, days of IRA investing, I listened to the “financial advisors” brought in by my employers as part of their 401(k) programs and bought their recommend mutual funds, which unfortunately for me had high annual fees.  (My IRA includes a couple of 401K rollovers.)  Eventually, I realized the impact of these fees and set out to transition to lower fee funds (and NTF too!)  Even later, I realized I had a large enough portfolio that I could get reasonable diversity in US large caps by investing directly on my own, and thus cut out the fees all together.  Whoosh, a large part of my account sold out of mutuals and moved to individual equities.  Through all of this, I’ve happily been using Fidelity as my IRA broker.

But now that I am thinking of applying options strategies in my IRA, I find that Fidelity has a few barriers set up for me.  First is that Fidelity limits the types of option strategies you can apply in an IRA, and they make it really hard to find this information on their website.  For example, as part of my research for this post, I can’t find a single way to see the options levels for IRAs until I eventually start the 9-page application process. I’m on page 6 before I even *see* the account options levels.  Turns out that IRAs only have access to two levels.  Either “Covered call writing of equities” or “Purchase of Calls/Puts/Straddles/Combinations (equity and index)”.  I’m already approved for the second and have found that Fidelity won’t even let me preview orders for some strategies (Iron Condor) I was thinking of trying.  Second, as I’ve blogged about earlier in the year, their commissions on options are pretty high.  The ‘Silver’ commission rate (for those with accounts totaling between $1M and $50K) is $10.95 plus $0.75/contract.  Anyone just starting out is looking at “Bronze” commissions of $19.95 plus $0.75/contract!

So why choose ThinkOrSwim?  Could it be that they send US customers who fund their account a free “highly fashionable TOS monkey as a token of our appreciation“?  While apparently the stuffed monkey is highly coveted, the real draw for me is this line from their IRA account description page: “you can trade any complex option strategy you like as long as the resulting position has defined risk.”  From reading other blog postings, this means you can indeed do Iron Condors, or use long positions on LEAPs as a way to set a defined risk on short near month trades, etc.

And on the commissions front, they have an interesting setup where you can choose between one of their own rate schedules or pick a commission schedule from a major third-party broker.  I can’t comment too much on that last choice yet (because I don’t have an active TOS account), but the standard TOS schedule for which I qualify sounds pretty good to me: the commission is either the lesser of $2.95/contract -OR- $9.95 plus $1.50/contract (only one $9.95 charge per unlimited spread legs.)  If I’m understanding that correctly, a single iron condor would thus incur commissions of the lessor between $11.80 (4 x $2.95) or $15.95 ($9.95 + 4 x $1.50). i.e. $11.80.  As a point of comparison, at Fidelity this would be $13.95 (and at TradeKing it would be about $22, ouch!)   Looking at the more typical trades that I’ve done, things look even better.  Selling a single call would be a $2.95 commission vs. Fidelity’s $11.70 (TradeKing’s is $5.60).

There are also many other things I’m looking forward to at ThinkOrSwim.  Such as $0 commissions when BTC short individual or single leg options for $0.05 or less — this will help minimize risk by closing out calls early and thus avoiding expiration day volatility.  And then there’s the 3 complimentary mutual fund trades per month, including the Vanguard family of funds (though I’m not sure yet if Vanguard charges their own load fees in this setup.)  And, like many brokers, ThinkOrSwim also offers rebates on account transfer fees.  Currently, they will rebate up to $100 for a transfer of at least $3,500.  And then there’s their highly rated software trading platform (which I haven’t done much to explore yet.)  And, it almost goes without saying, TOS has no annual IRA fees.   Oh, and then there’s that free monkey thing.

Tags: Brokerage · IRA

4 responses so far ↓

  1. 1 davmp // 2009.10.06 at 8:15 am

    ThinkOrSwim already sent me an e-mail indicating my transfer is “in process”.

  2. 2 davmp // 2009.11.08 at 5:57 pm

    Forget to point it out earlier, but my ACAT was completed within about 5 to 7 business days. I’m still learning to use the ThinkOrSwim desktop software, but man, I’m already quite impressed.

  3. 3 FYI // 2011.04.22 at 1:58 pm

    FYI,
    I use both platforms. Naked trades in Fidelity non-IRA accounts only. Their IRAs won’t allow me naked. TOS is definitely a more advanced platform but the commissions for Iron Condors is twice the cost of Fidelity.

    PD

  4. 4 Bill Deng // 2016.12.09 at 5:28 pm

    As of today (Dec 9, 2016) TOS is owned by TD Ameritrade. TDA does not approve any margin in any IRA account. Several years ago you can open an account in TOS without going through TDA. I guess you can not now. Instructors in TOS mentioned that option spreads are allowed in an IRA because the strategies have “defined risks.” But those people with the power of reviewing and approving option/margin upgrades either do not understand or do not agree with this criterion of “defined risks.”

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