You might think that the best online brokers rated for options trading would be the ones with the highest-rated options platforms. But you would be wrong. TD Ameritrade (AMTD), TradeStation and Interactive Brokers (IBKR) had the highest-rated options platforms in our general Investor's Business Daily Best Online Brokers survey. But for investors that actually do options trading, only Interactive Brokers stood in the top three for overall customer experience. Interactive Brokers took the top spot, followed by Charles Schwab (SCHW) and Fidelity.
And it took more than options platforms for brokers to earn high scores among option traders. Clearly, options investors value a wide range of broker qualities, beyond just the features of the platform they use to trade options.
Options Trading A Growing Opportunity For Online Brokers
Options trading provides an important revenue stream for online brokers. It offers high margins, and options traders tend to be more active. Not to mention it's a fast-growing segment. The number of cleared contracts for equity options trading has gone from less than 500 million to over 3.5 billion in the last two decades. That's according to the Options Clearing Corp.
That's consistent with what we've found in IBD's Best Online Brokers survey. In the last seven years, the share of respondents engaged in options trading grew from 22% to 31%.
As part of IBD's Best Online Brokers survey, we looked at how options traders rate their primary brokers. Of 2,762 investors who took part in the latest survey, more than 890 were options traders. Each options investor rated their broker on the 14 broker attributes that investors told us were most important, including Low Commission & Fees, Research Tools and Options Trading Platforms. We computed a Customer Experience Index (CEI) score for each broker, using the options traders' evaluations. Based on the Customer Experience Index scores developed by IBD's longtime polling partner TechnoMetrica Market Intelligence, we developed the top brokers ranking for the options traders segment.
Investors overall, including options traders, rank Low Commissions & Fees, Trade Reliability and Website Security as the most important attributes.
Price Matters For Interactive Brokers' Clients
Interactive Brokers is known for its attractive commission schedule. The broker's options traders rated it tops in this attribute. Options trading offers leverage and a smaller outlay of capital to control a lot of shares. As a result, higher commissions become a larger percentage of the trade.
Most brokers, like Schwab and Fidelity, charge a base commission per option trade plus a per-contract commission. Interactive Brokers employs a variable commission structure with no base commission. Pricing gets cheaper per contract based on the premium value and the monthly contract volume of the client.
A premium at 10 cents or below gets reduction from the standard 70 cents per contract. Monthly contract volume above 10,000 also has a tiered structure for lower per-contract commissions. Plus, there aren't any fees for exercise or assignment, a standout feature. Options traders gave Interactive Brokers the highest CEI score for Low Commission & Fees.
Commission Wars At Schwab And Fidelity Were Good For Options Trading
Charles Schwab and Fidelity also got among the highest scores from option traders for Low Commissions & Fees. They both slashed their commissions on equities and options to attract more trading volume. For options trading, they both charge a base commission of $4.95 per option trade plus 65 cents per contract.
Fidelity also handles low premium trades a little differently when closing a short option position.
Buy to close orders with a premium of 11 cents to 65 cents don't incur a per-contract fee. It's just the $4.95 flat fee for the trade. A buy to close order with a premium of 10 cents or less has no charge. That's a newer feature for Fidelity.
Those fee reductions can be important for a covered call strategy. If the premium gets down to a dime or less, you've nearly achieved your max profit. Why leave yourself exposed to the trade turning against you for the last $10 of profit per contract? With this structure, you can close your short option position for no fee.
Reliability And Security Are Valued
This year was the debut of Website Security as a category in the IBD Best Online Brokers survey. Option traders at Interactive Brokers gave the broker high scores for Website Security. The company offers a secure login system that provides an extra layer of security. Either a physical security device or IBKR Mobile Authentication can be used as an extra step of protection, much like a physical key. A hacker with your username and password can't gain access without physical possession of that key.
Schwab and Fidelity, which also use identity authentication, also scored high marks in this area. Schwab uses fingerprint-recognition technology for security and Fidelity has voice-recognition technology for over-the-phone interactions.
Options traders at Interactive Brokers, Schwab and Fidelity gave their brokers the highest scores for Trade Reliability too.
On a related note, trade improvement metrics might also appeal to the price-conscious options trader. All three brokers employ strategies in trade execution that can be even more lucrative than low commissions.
And what about options platforms? While options traders gave the top three brokers the highest scores for Website Security, Trade Reliability, Customer Service and Range of Products Available, only Interactive Brokers scored above average for Options Trading Platform. The two other brokers whose options trading platforms scored highest among options traders were TD Ameritrade (AMTD) and TradeStation. They also received the highest scores for Options Trading Platforms in the broad survey of all investors.
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