FFO Options 18: Stock Option Brokers

1. FFO Options 18: Stock Option Brokers Dr. Scott Brown Stock Options

2. Technological Advancement • Technological advancement is key to allowing us small retail traders to be competitive We’ve come a long way in terms of new technology and lower option commissions in just the past few years alone. I believe that stems from just 2 things: • The internet • The opening of the all-electronic International Securities Exchange (ISE) • It’s all about the electronic marketplace. The internet has allowed many traditional brokers to streamline their operations and to cut down on the costs associated with doing things manually. • With the introduction to of the ISE, we have seen a major competition brewing among the other options exchanges with regard to trying to keep the market share.

3. Stock Options Brokers There are 2 levels of commission rates: • The first one is the broker that will charge you a low rate per option contract, but will then add on an additional “minimum charge per order” fee. For example, $.75 per option contract with a minimum charge of $12.95 per order, this happens mostly at mainstream, big name brokers. • The second type of stock options broker is one that offers “Direct-Access” trading. These are much higher –end brokers who cater to very active traders who don’t need any help with their trading. The trading platform is very sophisticated and has a direct link to all the exchanges, which allows you to direct your trades to whichever exchange you want. These are truly the “point-and-click” type of trading platforms that require minimal keystrokes to enter a trade • The main advantage of these brokers is that reduced cost to them to run their business in turn lowers the commission for us. • One disadvantage is that the trading software does have a learning curve to it and you’re pretty much at the mercy of the online tutorial to figure out how to use if.

4. Commodities Brokers • Commodities such as gold, silver, oil, corn, soybeans, coffee, sugar, cocoa, orange juice, cotton, pork bellies, and hogs, you can trade these contracts online through your computer but many of the orders are still handled by human pit trades for execution. • When opening an account to trade these commodities, you have to open a “commodities” account. • I haveusednumerousbrokeragesovertheyears and GeckoFinancialisthebest!

5. 5 different types of fees when you initiate a commodity option trade • Commission fee: this is the commission your broker will charge you • Clearing/processing fee: this is the fee your broker will charge you to clear the trade through its system • Exchange fee: this is the fee collected by the exchange where you make the trade • Floor brokerage fee: this is the commission the floor broker will charge to execute your trade on the exchange. • National Futures Association (NFA) fee: this is the fee charged to you by the NFA. Every trader gets hit by this rip-off.

6. 5 different types of fees when you initiate a commodity option trade (Cont.) • In addition to fees, the broker will charge you on a round-turn basis: this means that the broker is charging you up front for the opening and closing transactions, regardless of whether you end up closing the transaction. Specifically this refers to options that expire worthless, the broker still charges you up front for both sides of the transaction whether it expires or not. • What you want to do is a half-turn basis; this means that you will be charged the appropriate fees only when you make a trade. So if your option expires worthless, you won’t be charged for that side of the transaction.

7. Commodity update • Beginning back in June 2007, the NYMEX officially brought back the electronic version of the options to trade simultaneously side by side with the pit version of their options. The NYMEX had offered this type of trading during the night-session back in the mid-1990s, but discontinued it in early 1998. This included the COMEX division of the NYMEX, where metals options and futures are traded. The NYMEX had already begun trading their futures contracts electronically side by side with the pit in September 2006, but the options didn’t come on until almost a year later. • This allowed retailers traders to bypass the pit altogether and place their own option orders directly into the electronic system. Even though electronic options exchange is a great way to trade they haven’t caught on yet, as most of the option volume is still traded in the option pits on the floor of the NYMEX.

8. Commodity update (Cont.) • The ICE Futures Exchange started trading option contracts (coffee, sugar, cocoa, orange juice, and cotton) electronically in March 2008 side by side with options in the pit. • The CME itself has offered electronic trading for many of its financial futures and options products for longer than any of the other commodities exchanges. • The CME, which has also bought out the CBOT, has offered electronic trading of their flagship grain markets, too (corn, wheat and soybeans) • One of the great things about the electronic options market for the NYMEX, CME, CBOT and ICE is that they are open for trading many hours longer than the pit options market. On the downside, though, many floor traders are losing their jobs because the electronic trading of certain futures contracts has put them out of business. • The best effect of these advancements for us is that we will continue to see lower rates on out commissions.

9. Option Approval • The brokerages will approve you for certain types of option trading strategies based on the risk level of each trade. Almost everyone is approved right off the bat for straight buys of calls or puts and to execute covered calls. • The second level puts you into the category of option spread; the third level allows you to do naked put options; and the fourth level, which is the most risky, is to sell naked call options. This level is reserved for the most experienced and well-capitalized traders.

10. Last Words • Commissions factor into your net profits. • Be aware of how much you’re paying for each trade. • The brokerage landscape is changing very quickly, so you might find yourself switching brokers from time to time. • Trading is a business, so treat it as such, keeping cost low and profits high is vital to long-term success.

11. Disclaimer • DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS.  In our opinion, we believe, it may be possible, that heavy smoking and drinking may be hazardous to your health.  If you choose to smoke and drink while trading, The Delano Max Wealth Institute nor Dr. Scott Brown is liable for any damage it may cause.  If you slip and fall on the ice, we're not liable for that either.