FAQ Section

Broker Commissions

Are there any strategies to get my commission rate reduced?

Yes. We always suggest that you negotiate with your broker to have a lower overall commission rate. One of the techniques that we consistently try with our broker (thinkorswim) is to reach out to them at the end of the year and ask for a reduction in commission based on our trading activity. Remember that brokers are in this business to make money too and it’s not always about charging the highest commission rate possible - they also will bend when you have a lot of trading activity. If you do not make a lot of trades each year, they're not likely to reduce your trading commission. And rightly so because you don’t often trade so why would they give you a cheaper rate when they don’t even know if you’ll be active in the future. If this is the case, you will have to make some trades early on, at possibly a higher rate, to show them that you are serious and committed to this business before they commit to a lower commission rate structure for you. In the end, it's a win-win for everybody. If you can make more trades at a lower commission rate, you'll have a higher probability of success and have a higher profit at the end of the day. And if you are more active and trading more often, the broker will get a client that stays on longer and is more assured of your loyalty which in turn will allow them to drop your commission rate. At the end of the day there are many different strategies out there online but always put yourself in the shoes of your broker when negotiating. Try to see the benefits to them and play to those strengths.

Sometimes you sell a credit spread worth only $25 per spread but my commissions are too high - what should I do?

There are two things you can do. First, find a new broker. Thinkorswim offers many new accounts (not all) the ability to reduce commissions down under $2 per option contract traded or in some cases offers a certain number of free trades per year when you sign up. Second, increase the trade size or width of the strikes to compensate for your higher commissions. Instead of trading five credit spreads $1 wide and collecting $25 each - try trading one credit spread $15 wide and collecting $125. For roughly the same risk/reward you’ll pay much less in commissions. As you probably would guess I favor the first option vs. the second - and always make sure that your positions are appropriately sized for your account. Even with these two options as traders, we focus too much on our commission costs and rarely if ever do you “feel” the pain that slippage costs your portfolio. You should worry less about commissions and more about slippage by focusing on only highly liquid options and underlying stocks. The money you lose in slippage is likely more than what you think your broker is taking from you in the form of higher commission costs. We’re not saying that commissions should be ignored; we’re saying that slippage often for new trades is more “expensive” than higher commissions, so focus on both to reduce costs.

Is it better to have a ticket charge or per contract commission rate structure?

First, there are many differences between a ticket charge and per contract commission rate structure, and it also will vary by account size and your average trade size. In our opinion, we prefer to have the per contract commission rate currently set at $1.25 per contract. This way we can easily get into and out of trades without having to worry about a total large ticket charge for a trade. For example, if we got into an iron condor we might choose to exit one side of the iron condor and we would only pay for the contracts that we exited at the time - not an additional high ticket charge for that trade. Talk with your broker and analyze your account level and trading activity to see which type of structure is best for you.

My broker charges me a very high commission rate that makes smaller trades unfavorable - how can I get around this?

You could find a new broker that has cheaper commissions. Sure it might be a hassle to move your account and funds over but if you have a small account and your concern is high commissions then it’s worth the effort don’t you think? If for some reason you are completely restricted to using that broker or do you not want to find a new broker then you would have to increase your trade size or the width of your strikes with spreads to make the trade worth your time and money. Increasing the width of the strikes means you’ll be taking more risk in some cases, but you’ll also get a higher credit to compensate for the higher commission costs and ideally trading fewer contracts overall.

How often should I contact my broker to negotiate my commission structure or trading rate?

We suggest at least negotiating with your broker once a year. It's always a good idea to have your eye on other broker and platform charges out there so that you can use that as leverage to get a lower trading cost and commission rate structure. In our opinion, the best time of year to negotiate with brokers is at the end of the year as they're always looking to maintain customer relationships as they head into the fourth quarter. Because we always know that it's more expensive for them to gain a new client than it is for them to reduce our commission structure and keep us as a client, they are more willing to cut deals during this time of the year.