Revisiting the choice of brokerage to use when trading options

February 14th, 2009 · 1 Comment

We’ve been in a sort of limbo this week, not quite yet having thought through how to modify our investing plans as a result of recent events.  We still want to put our cash to use but are just not sure what brokerage to use to do it.

image: http://www.sxc.hu/profile/OmirOnia

image: http://www.sxc.hu/profile/OmirOnia

As a review of our goals, we know we want to build up, over the next 10 years, our passive income stream using a diverse set of sources.  Businesses, income property, dividends, trading, etc.  But as of now, we don’t have the funds to diversify by buying a business or property.  (We are working toward starting businesses, but that’s a different discussion.)  So instead we are focusing on establishing dividends in our tax-advantaged retirement accounts and learning to trade in the post-tax accounts.  It’s the latter that has been most effected by recent events.

Up until now, we had been investing all of our GI portfolio (which, by the way, is all post-tax, non-retirement funds) in relatively high-yield securities through ShareBuilder.  We had chosen ShareBuilder for two main reasons.  The first was the ability to get a $3/buy transaction cost and the second was the ability to put 100% of our portfolio into the market via fractional shares.  But as I mentioned a few posts ago, as of February we’ve decided to stop making extra principal payments on our debts and instead direct that money into our GI portfolio.  This significantly bumps up the growth rate of the portfolio from contributions, which in turn means we’ll be able to switch from short-term investing type activities toward more active trading type activities a bit earlier than we had thought.  In fact, we’ll be at the point where we can reasonably start pursuing those strategies in March unless something unusual should happen.  We plan our first forays in the “more active, trading type” activities to be some of the more conservative options strategies, such as trading covered call options.

But where to do it?  We already knew we didn’t want to do that sort of trading at ShareBuilder as their transaction costs are way too high for that sort of activity.  We had thought Zecco, with its 10 free trades per month, was the obvious choice but they just bumped their minimum from $2,500 up to $25,000 in order to qualify for those free trades.   It would take us more than 2 years of contributions to cross that threshold!  So while that doesn’t take them completely out of the running since they still offer $4/trades, it does re-open the question of which brokerage to use as a result of them not being so infinitely ahead on transaction costs.

One interesting new possibility I’ve found in the last week comes from a Python User’s Group meeting where one of the members gave a talk about how he and a friend have implemented an automated “opportunity screening” tool that uses the data feeds from InteractiveBrokers.com.  They chose these guys because of the combination of an available programmatic API for parsing their real-time, market data stream, and their low transaction costs.  For US customers, they offer a $0.005/share or less transaction cost on stocks and ETFs, and $0.15 to $0.70 transaction cost on options.   Now, admittedly, these guys aren’t a huge operation but the user’s group members giving the talk gave them high marks for execution speed.   My wife and I still need to do more research about these guys before making a move but I’ll admit I’m not super thrilled about a cost-per-share-transacted fee basis.

One thing we know for certain is that we need to start with a broker that is somewhere south of $10 to $15 per round-trip option trade.  In my periodic check-ins on the options market, there are just too many situations where the transaction costs at a place like Fidelity, Schwab, or even ETrade would take a rather serious chunk out of the profit otherwise.  If the round-trip transaction cost is $25 to $30, that leaves you with a profit of just $70 on an option trading at $1.  For an option trading at $0.40, why even take the risk of capping your profit when holding the underlying equity?  Of course, that assumes, like us, that you only have the portfolio to transact low numbers of shares.   If your portfolio is bigger, maybe these places are right for you.

Anyway, for us, that leaves places like Zecco, TradeKing, SogoTrade, and InteractiveBrokers in the running.   I’m hoping to do more analysis this weekend and get it sorted out without further delay.

Tags: Brokerage

1 response so far ↓

  1. 1 Moving our GI portfolio to TradeKing | Geographic Independence // 2009.06.30 at 10:22 pm

    […] last posts about picking a brokerage talked about how my wife and I had decided to go with ShareBuilder on a temporary basis, but were […]

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