Option trading can provide a great opportunity for investors to maximize their profits in the stock market—but only if they have the right information and strategies at their command. That’s what you gain access to when you subscribe to The Wagmore Advisory Letter, a long-term investment newsletter that, since its launch in August 2013, has provided expert advice on covered call strategies for reducing the risks involved with investing in the stock market.
However, for all the educated counsel that we provide, we can’t interact directly with the market on your behalf – that’s where a brokerage firm comes in. It is probably safe to say that anyone whose investment journey has brought them to this website already has a reasonably firm grasp of brokerage firms and their various services. What you may not be certain about, however, is which firm to trust with your time and money. To be sure, there is no shortage of online brokers in the world today… so which broker is best for you?
Unfortunately, as publishers of several stock market newsletters, we are in the business of recommending great investment ideas for our subscribers rather than recommending online brokers; having said that, we recognize that our clients are often looking for information to help them get started on the path towards taking control of the their financial destiny, and, with that in mind, we have put together this short report that looks at some of the more well-known online brokers that can be used for option trading.
However, before we begin, we want to remind you that nothing here should be taken as an endorsement of the brokers listed on this page since, as mentioned above, that’s not our area of expertise! These brokers are simply listed alphabetically, not in order of merit, and those discussed below are not necessarily superior to others that may not be listed. The purpose of this list is simply to acquaint you with a few of the higher-profile brokerage firms out there. A final caveat: This information is as accurate as we could manage, but prices and other important data can change at any time, so please do your own research before committing yourself to any particular online broker, whether they’re listed here or not. Having said that, let’s take a closer look at some online brokers that may be of interest to you.
Established in 1971, Charles Schwab is among the online brokers out there that enable their customers to execute option trades. At present, their commissions for option trades run as follows: online trades charge $8.95 + $0.75 per contract; automated phone trades come with a $5 service charge; and broker-assisted trades have a $25 service charge. Schwab also provides a number of online features to aid the aspiring options trader; these include the Trade Assessor and Option Builder® tool. Another notable feature is optionsXpress, which provides an “all on one” platform with a variety of supplemental tools, including access to real live trading specialists.
Founded in 1982, E*TRADE Financial Corporation also offers options services through its website. The basic options commission over here is $9.99, plus $0.75/options contract, but the fee schedule comes with a number of nuances and variations. With 150 or more trades in a quarter, the price drops to $7.99, plus $0.75. The fee for options exercise and assignments is $19.99. The site also includes mobile trading support that enables customers to place their trades on the run, if need be. Clients also have access to a variety of support tools, such as an Options Screener and Probability Calculator.
Fidelity’s basic fee for option trades is currently $7.95 per trade, plus $0.75 per contract. The company also touts no commission fees on buy-to-close orders executed at $0.10 or under. In addition, its website includes a generous selection of informational videos and webinars (labeled Beginner, Intermediate, or Advanced) about topics relating to options trading. Finally, it’s worth pointing out that Fidelity requires a minimum of $2500 to open a brokerage account with them.
OptionsHouse charges no maintenance fees and requires no minimum balance to maintain an account in good standing. Base option fees are $4.95, plus $0.50 per contract. The OptionsHouse trading platform provided to customers features the tradeCYCLE tool, which includes the company’s proprietary Exit Plan (for determining exit points for trades) and the liveACTION scanner (for real-time exploration of streaming quotes and other market activity).
With over 500 branch offices across the nation, Scottrade is another potential pit stop of the options trader. Online option trades are priced at $7, plus $1.25/contract; broker-assisted and touchtone-phone trades go for $32, plus $1.25/contract. Option exercises and assignments are set at $17. Scottrade also permits its customers to buy and sell "mini stock options" through a limited number of securities; the commission schedule for these is identical to the basic options schedule. Active traders can take advantage of the ScottradeELITE trading platform; it’s available to those customers with an account balance of $25,000 or more. Scottrade requires a minimum initial deposit of $2500.
At TD Ameritrade, online option trades are priced at $9.99 + $0.75 fee per contract. Moreover, using the IVR phone system for trades incurs a charge of $34.99 + $0.75 fee per contract; broker-assisted option trades are priced at $44.99 + $0.75 fee/contract; and option exercises and assignments are at $19.99. The firm also offers several online tools to enhance the trading experience for its customers, including the “thinkorswim” platform and the TD Ameritrade Mobile Trader App for the on-the-go investor. For those concerned about such things, it may be worth noting that TD Ameritrade is an official sponsor of the National Football League (NFL).
A relative newcomer on the scene, having started in 2005, TradeKing is yet another brokerage firm that handles options trades. Option trades are priced at $4.95 plus $0.65/contract. The option exercise fee stands at $9.95; option assignments are priced at $4.95. Furthermore, there are no commission fees on buy-to-close orders for short options of $0.05 or under. TradeKing will levy an annual $50 Inactivity Charge if the account is dormant for 12 months and the combined value of all household accounts falls below $2500.
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I Need to Know When I’m Assigned. Why Is Option Assignment Notification So Screwed Up?
Posted by Pete Stolcers on October 22, 2007
Option Trading Question
I don't know if I am even directing this question properly, but I am trying to overcome the bs replies from various brokers and the option trade groups. How is it possible or justified that a call writer who is assigned on a Thursday or Friday is not be informed of it until it is too late to do anything other than buy shares in the open market to deliver, incurring a heavy loss? It seems to me this should be fought vigorously. Especially with spread positions the writer needs notice of the short leg assignment in time to exercise his long leg in order to acquire the shares at the strike price. Notice to exercise and notice of assignment should be required to be delivered by Friday morning and no later. Am I missing something here, except the advisability to always close out spread positions before expiration?
Option Trading Answer
This is a very complex topic to address because there are so many moving parts to option assignment. I will try to break my response down into a number of different areas.
First of all, let’s be clear. We are talking about assignment on a stock option. Cash settled American-style options like the OEX is a completely different story and I’m not going to cover those complexities in this article.
When you sell options (covered or uncovered) you have obligations, no rights. Before you consider selling an option, get used to the idea that you are powerless. You do not control the situation, the option buyer does.
The naked call writer has unlimited risk. If the stock skyrockets, eventually the writer will lose point for point with every dollar the stock rallies. The option short seller will never get assigned unless the option is in the money. It must have intrinsic value and the option must not be trading with any time premium. If the option is carrying premium above its intrinsic value, the option buyer will be better off selling the call in the open market than he will be exercising the call. If you don’t understand this statement you need to brush up on your option basics.
Let’s say that the option is trading at its intrinsic value. As the naked writer, you must know that you are at risk. If you want to avoid assignment, you need to buy your call in. As far as risk is concerned, you don’t have any greater risk by being short the option or by being short the stock via assignment. At this stage, every point that the stock moves higher, the options will increase in value by that same amount and so will your liability. The delta of the position is -1 and you are effectively short the stock by being short the option.
In the case of a call credit spread, your risk is limited to the difference in the strike prices less the credit received. Let’s say that you sold the $50 calls and you purchased the $55 calls. The stock rallies and it is that $56 a few days before expiration. If you get assigned on the $50 calls, you are short the stock at $50. You can immediately exercise your right to purchase the stock at $55. The end result is that you are selling the stock at $50 and buying it at $55. You still get to keep the credit he received, so your risk profile has not changed due to assignment. You have simply lost the maximum on this trade. This same scenario will hold true no matter how high the stock goes. It could go to $100 and your outcome would be the same.
Let’s say that you were assigned and you came in the next day and the stock dropped from $56 to $54 on the open. If you are contesting that because of assignment you now lost money on your $55 call that you are long, you would be wrong. The $55 call will lose value, but it has a lower delta then the stock. Let’s use some real numbers. When you were assigned on the stock it was at $56. You were short at $50. When you come in the next day you are able to buy this stock and cover the position at $54, $2 less than it closed the day before. In this case you only lost $4 (not $5), plus you still own the $55 calls. Clearly, in this case getting assigned actually helped you.
As you can see, getting assigned on one of the legs of your spread did not increase your position risk, it could only reduce it. The maximum risk on a stock credit spread is the difference between the strike prices, plus the credit received.
Briefly, if you are in the spread on expiration Friday and one of the legs is closing right at the money and you don’t know if you are going to get assigned or auto exercised, close the spread. Otherwise, you might come in Monday morning with an unexpected position and that could increase your risk. This was not a primary topic for this article, but I thought I would make reference to the situation.
To this point I have talked about how assignment on a naked short or a credit spread does not impact the risk profile of the position. Now let’s talk about the assignment process and what a good brokerage firm should do to help you.
Option buyers have until the close to hand in their exercise notices. The brokerage firms submit the exercise request to the Options Clearing Corporation (OCC). The OCC processes the request and uses a lottery system to determine which brokerage firms that have a short position will get assigned on the option. They also determine how many contracts the firm will be assigned on. Overnight, the OCC notifies the brokerage firm and they need to review all other accounts that are short those options. Through a standardized lottery system they determine which customers will be assigned. As you can see the processes involved.
Once the brokerage firm allocates its assignment across the accounts, it should notify customers that this has taken place. That notification can take any form. I’m certain that in the age of electronics, brokerage firms put the responsibility on the customer to check the account on a daily basis.
As a customer, if you are assigned you will look in your account and see that you are short shares of stock if you were short calls. Once the market opens you can either exercise the same number of calls or you can buy the shares as I described above.
During assignment, you have one day to adjust your position (the next business day) without incurring the additional margin required for a short stock position. If you cover the position that day you are granted something called “same-day substitution” and you are not required to put up any additional margin.
As you can see, the assignment process is complex. Where stock options are concerned, the assignment does not increase risk, it can only reduce it in the case of a spread. It would be nice if a brokerage firm notified you as soon as they are allocating assignments, but I know that is not always the case.