As a trader, you have to always keep in mind how much commissions are costing you each year. A moderately active options portfolio will generate from 10% to 30% of the value of that portfolio in the form of commissions per year.
In other words, if you have a $10,000 options portfolio, at the end of your first year of trading, you may incur commission costs running from $1,000 to $3,000. That's huge!
Here are 5 ways to reduce your trading commissions:
- Stop The Excess - Attempt at all times to avoid excessive trading. Stay away from strategies that require a lot of activity and especially stay away from obsessive day trading. I have never met someone who could consistently make money year after year day trading on an average income.
- Budget for Commissions Before The Trade - Before you enter a strategy, build your commission costs into the profit and loss of that strategy. It's just the smart thing to do.
- Consider Changing Brokers - I know you probably like those E-Trade commercials (so do I!) but maybe they don't have the lowest commissions. Remember that some brokers have specials for trading over 5 contracts at a time, so consider your trading style and needs when comparing brokers.
- Select Strategies That Are Simple - Ever heard of a double-wide calendar spread? Well, it's a huge position and takes a lot of options just to build - not to mention a lot of trading to maintain the position. To control your commission costs, you should attempt to select strategies that incur the smallest commission costs per dollar invested. The ideal strategies are the simplest.
- Avoid Exercising Options At Expiration - Exercising an option at expiration costs a lot of money. It costs commissions, and when you have an assignment, you may be shocked at the commission costs involved for that side of the trade. Therefore, try to close out the trade with an opposite options order.
Check out these other great resources for lowering your commission cost: