Options are like the prettiest girl in school -- you're afraid
of her but, naturally, you're very drawn to her.
So it is with options.
They're different from most investment tools. The instrument
is far more complicated than a stock. Education is crucial. And
your demands of an online options broker will be different than
those of a straight stock-trading platform.
The results from
IBD's Best Online Brokers survey
show five online options brokers that investors believe meet
their special demands.
These results are a bit surprising. You won't find the biggest
names here, although some of the winners have been acquired by
the big guys.
The five winners: Thinkorswim, OptionsXpress, OptionsHouse,
TradeStation and Interactive Brokers.
Is it possible that the complex, high-risk nature of options
attracts a specific breed of investor?
"Absolutely," said Michael Burke, vice president of client
training at TradeStation. "Options trading is very different. It
requires a different level of commitment (than stocks)."
A stock trader need only determine if he likes a stock enough
to buy it. To
invest successfully in stock
options, a trader must take his buy-or-sell decision to the
options market -- then work hard.
"There are other considerations (than just buy or sell),"
Burke said. "First of all, options expire. So you have to
consider the time value."
Say you bought theApple (
) March 500 calls on Jan. 16 at 31.00. The stock ended that day
at 506.09, so 24.91 (31.00 minus 6.09, the amount that Apple's
price stands above its strike) is simply time value. And, with 59
days to expiration, you're spending 42.2 cents per day for
Is that a lot? Is Apple's volatility high these days relative
to its usual behavior? Maybe.
To make it more interesting, you may consider a short-option
strategy. You don't want to pay for time? Don't buy the call;
sell the put. Apple's March 500 put is trading at 27.05. Sell one
of those, which is all time premium, and someone will be paying
you 45.8 cents per day.
What's the risk? You're short an instrument than can scream
higher at a moment's notice, costing you more money than you
thought you were risking. Oddly, the best way to protect yourself
from such a catastrophe is with options.
As you ponder these questions, you see the truth: Education is
offers the new customer a basic intro to the company's platform.
"One of the benefits of TradeStation is high-quality education,"
Education also is a big part of the approach for Thinkorswim,
the options-and-futures platform operated byTD Ameritrade (
and browse around. Under the Support tab you'll find several
tutorials that will be helpful to non-pro traders. Check out
Option School, one of the Support tab selections.
You'll find lots of info here. Don't be disheartened if, an
hour later, you've raised a maze of questions.
Now you might see what trading feels like while acknowledging
you know just enough to get into trouble. That's OK. On
Thinkorswim you can play make-believe. Or maybe you're already
options-fluent and just want to see what this platform looks
Hit the Software tab on top, then click on Paper trading --
paper money. You'll be invited to register and download the
paper-trading platform. Now browse. Explore. Click. Build a
See how the options are listed. See how some of those fancy
spread strategies are presented. You'll recognize some from your
work at the Option School.
OptionsXpress, aCharles Schwab (
) product, also offers a virtual account (the broker starts you
off with $25,000 in imaginary funds). Same for OptionsHouse.
Both have plenty of education materials for you to delve
Be prepared: Getting access to those features requires more
work (and more personal info) than Thinkorswim. But for those
shopping for a new online broker, go ahead. This is how you'll
see different trading platforms. Only you will know which is
right for you.
Almost any decent online broker will offer Webinars, video
tutorials and other modes of learning delivery. No two will be
identical. Get the benefit of as many as you can.
Education, while crucial, is not enough. You'll come up with
some ideas that will be unique to you -- your style, your risk
tolerance, your imagination. Some of these ideas will be
brilliant. Some will be embarrassingly idiotic.
Wouldn't it be nice to test them out with a what-if model? The
complexity of options demands that you take your parameters and
see how they would have worked.
Most of the survey's top five brokers offer back-testing
tools, including Interactive Brokers, which gears itself toward
"the pros, the semipros, institutions and people who want to do
their own homework," said Steve Sanders, IB's executive vice
president of marketing and product development.
"Interactive Brokers' customers include many professionals,
more do-it-yourselfers" than, say, E-Trade or TD Ameritrade,
Sanders said. He claims Interactive leads the industry in daily
average revenue trades. So E-Trade may have a vast number of
customers, but the average Interactive customer will execute far
Those are the clients IB prefers, Sanders explained. To get
them, Interactive offers its own proprietary screens and tools.
One is the OptionTrader, which shows chains, volatility and the
Do you know your Greeks?
Do you not even understand the question?
Didn't think so. You still have work to do.