What Is the Top Cheapest Brokerage for Options Trading?
If you’re serious about making money with options, then you might be asking yourself: “What is the cheapest brokerage for options trading?”
First of all: congratulations. It’s a very good that you’re even asking that question.
Trading options can get very expensive with the wrong broker. That’s especially the case if you’re an active trader.
Expensive commissions can eat into your return. In fact, they can crush your return.
You need to find a broker that offers the right balance between quality of service and low-cost commissions.
In this article, I’ll help you find that broker.
What Are Cheap Brokerages For Options Trading?
First of all, it’s important to define “cheap.”
For the purposes of this guide, cheap doesn’t mean low-quality. It simply means inexpensive.
If you take options trading seriously, you’ll need a brokerage that offers a state-of-the-art trading platform, educational resources, multi-leg orders, and margin. At a minimum.
You’ll also need a customer support line that can answer questions and help you fix problems.
Fortunately, there are affordable options that offer great service.
When options traders talk about “cheap” brokerages, they’re often referring to just one thing: commission.
A trading platform with high commissions can devastate your total return. That’s why it’s absolutely essential that you find a service that doesn’t charge you a whole lot to place trades.
But even the most experienced traders often overlook another criteria for finding a cheap brokerage: the margin rate.
On occasion, you might find yourself trading on margin. If that happens, you want to make sure that your rates are low so that your returns take a minimal hit and your losses aren’t blown up with a high cost of money.
So to summarize, you’re looking for an online brokerage that offers:
- Quality (but not necessarily the best) service
- Low commissions
- Low margin rates
When you consider all those requirements together, one brokerage emerges as the hands-down winner.
Interactive Brokers For Options Trading
Interactive Brokers is considered by many active options traders to be “the best.” That’s because it strikes the right balance between affordability and quality of service.
For starters, IB offers a commission of just $0.70 per contract (with a $1 minimum per trade).
That compares favorably with ETrade, which charges $6.95 per leg plus $0.75 per contract.
TD Ameritrade isn’t much better. On that platform, you’ll pay $6.95 per leg plus $0.65 per contract.
So if you place an iron butterfly trade with just one contract in each leg, you’ll pay around $30 in commissions on ETrade or TD Ameritrade. You’ll only pay $2.80 on Interactive Brokers.
If you do the math, you’ll find that’s a savings of more than 90% with IB.
Now multiply that by 10-12 trades per month for 12 months a year. Your portfolio will take an enormous hit in commissions on ETrade or TD Ameritrade, but not so with Interactive Brokers.
Of all the brokers surveyed by Investopedia, Interactive Brokers also had the lowest margin rates. That can give you even more savings as compared to other companies.
But what about quality of service? I’ll keep it real: in the past, IB had a reputation for poor service. That was years ago, though.
Within the past few years, Interactive Brokers seems to have gotten its house in order.
Its Trader Workstation platform, for example, is now much more user-friendly than it was in the past.
Likewise, mobile apps are easier to use. Some of them even accept voice commands!
A fairly new feature, called IBot, lets you view options chains by asking for them in plain English.
Also, the platform offers a Probability Lab. That lets you do some practice trading before you risk any real money.
Pro-tip: use that feature to test your trades, especially if you’re new to options trading. You’ll be glad you did.
Still, it’s not a perfect platform. You do get what you pay for, after all.
For example, you can only display streaming quotes on a single device at a time. In other words, you can’t stream quotes on both your laptop and your smartphone simultaneously. For one of those devices, you’ll have to settle for snapshot quotes.
The customer service is there, but it’s not as good as the quality of service you’d receive with ETrade or TD Ameritrade. That’s what you get when you save that much money in commissions.
Finally, if your account is worth less than $100,000, you might have to pay a minimum of $10 per month if you don’t generate any revenue for the company with your online trading.
Overall, though, Interactive Brokers is probably your best bet if you’re looking for a cheap trading platform for options.
Honorable Mention: Lightspeed Trading
Another cheap brokerage is Lightspeed Trading.
First, it offers trades that are even cheaper than Interactive Brokers. You’ll pay a commission of just $0.60 per contract at most.
Lightspeed Trading will scale commissions downwards for very active traders. You can pay as little as $0.20 per contract if you trade more than 100,000 contracts every month.
And there’s no charge per leg as there is with ETrade and TD Ameritrade.
The platform also offers analytics tools that you won’t find elsewhere.
You can also group your positions by the symbol of the underlying stock price. That will help you determine which trades are profitable if you’re buying and selling numerous contracts every month.
Lightspeed Trading also uses a sophisticated trading platform. It can locate mispriced options or market imbalances.
The tool will also help you get in at a great price with complex trades such as condors and butterflies.
So why wasn’t Lightspeed Trader listed as the top option for a cheap brokerage? There are a few reasons.
First, it’s got a high minimum balance ($10,1000) to open an account. Interactive Brokers, on the other hand, has no minimum balance.
If you’re just getting started with trading, you might not have $10,000 to throw at a new brokerage. If that’s the case, you should choose IB.
Also, LightSpeed Trading has a $100/month charge. That’s just too pricey to put it in the top spot.
Additionally, the mobile and web apps don’t allow direct market access or futures trading.
Finally, there’s limited educational material on the website. If you want to learn on a platform that also offers inexpensive commissions, go with IB.