Want to know the easiest way to increase your trading profits by hundreds to thousands of dollars a year? Reduce costs. Specifically, commissions – those pesky few bucks you shell out each time you buy and sell a stock, option, or futures contract.
You may be wondering how your rate compares to others. When playing commission limbo, how low can you go? The answer varies from broker to broker, but remember, competitition is fierce, margins have been sliced razor thin and traders are in an extremely powerful position. Never forget you are doing your broker a favor by parking your capital there, not the other way around. If they’re unwilling to play ball, to reduce your commissions to a competitive level, then don’t be afraid to thank them for the memories and kick ’em to the curb.
While I can’t speak for every broker, let’s take a look at three of the cheapest I’m aware of: Interactive Brokers (IB), ThinkorSwim (TOS), and TastyWorks (TW).
If you’re paying more than $1.00 to $2.50 per stock trade then savings await! IB charges as little as $1 per stock trade. TW is the equivalent of $2.50 per trade ($5 roundtrip). I’ve been able to negotiate TOS down to $4.95 which isn’t great but since I primarily trade options it hasn’t been an issue.
On the options front, if you’re paying more than 65 cents to $1.00 per contract, then you’re probably overpaying.
IB is at 70 cents per contract (with a $1 minimum). TW is around 65 cents ($1.30 roundtrip). I’ve seen TOS go as low as 85 cents per contract.
I first started with OptionsXpress back in 2006. If memory serves correct I wa paying around $5 to $7 for an options trade. These days that would be highway robbery!
Let’s think about how these fees translate with a spread trade. I’m going to use the TOS rate of 85 cents to illustrate. For a two-legged spread like a bull put I would be paying $1.70 to enter. And if I exit early that’s another $1.70, so $3.40 roundtrip. If it’s a $5-wide put spread sold for 50 cents, then the commission represents 6.8% of the max gain. Better yet, if I simply let the spread expire worthless then I’m only paying $1.70 for $50 of profit which is a scant 3.4%.
Obviously, the lower your commission as a percentage of profits the better. Anything below 10% is fine. Below 5% is better.
Now, how about the cost for a four-legged spread like the mighty Iron Condor? To enter I’m paying $3.40 (85 cents x 4). If the potential reward is $100 and I ride to expiration then the commission cost as percentage of gain is 3.4%. If I exit early, then I’m up to 6.8%. Either way, the impact of commission is negligible.
If you’re using TastyWorks or Interactive Brokers then there’s no negotiating needed. They start you out at their basement level rates. It’s ThinkorSwim that requires you to turn on the charm and work some magic. I suggest logging into your thinkdesktop platform and using the support/chat feature to create a support request with the trade desk asking for your commission rate to be lowered to a flat rate of X per contract with no ticket charge. $1.50 is a gimme. I’d shoot for $1.00 or less.
The only way the ticket charge structure is beneficial (i.e., $4.95 plus 65 cents a contract) is if you’re doing ten contract trades or higher. It obviously varies depending on what the actual rate is. The lion’s share of traders I’ve taught are better off by dodging the ticket charge and going the flat rate route.
We live in a golden age of trading. From a cost perspective, no generation has had it better. Are you taking advantage of these low rates?