5 Online Options Trading Firms That Please Investors
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 ( AAPL ) 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 time.
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 key.
TradeStation offers the new customer a basic intro to the company's platform. "One of the benefits of TradeStation is high-quality education," Burke said.
Education also is a big part of the approach for Thinkorswim, the options-and-futures platform operated byTD Ameritrade ( AMTD ).
Land on Thinkorswim.com 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 like.
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 market watch.
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 ( SCHW ) 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 into.
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 more trades.
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 Greeks.
Do you know your Greeks?
Do you not even understand the question?
Didn't think so. You still have work to do.