Stock options can be used in a number of ways. They can reduce the risk in your portfolio, or substantially increase the risk for higher returns. But one thing is concrete: Options add some complexity when it comes to selecting the best brokerage for your portfolio. In the article below, we'll review what E*Trade (NASDAQ: ETFC) has to offer the individual investor with a focus on fees and features that are important to options traders.
Standard trading commissions
E*Trade uses a base-plus commission schedule that is common in the discount brokerage industry. Commission prices vary by the size of the trade, as it charges a flat fee per trade, plus a variable price per options contract.
Source: Company website.
These prices are the broker's base published prices. In this case, E*Trade offers active traders a lower commission schedule ($4.95 plus $0.50 per contract) when they complete more than 30 trades per quarter. Many brokers have special offers for opening a new account, which can also reduce the average cost of making a trade.
Multi-leg options and exercise and assignment fees
Stock options trades can get complicated quickly, as many strategies employ multiple contracts, with varying strike prices, and expiration dates in a single trade. Investors who deal in multi-leg options trading and exercise or take assignment for options positions should be thorough when shopping for a brokerage.
Source: Company website, Barron's.
E*Trade doesn't offer a free or low-cost way to buy-to-cover low-priced options, which may turn off some investors who use short options strategies or trade in low-priced options contracts. Buying to cover low-cost options can be part of a prudent risk management strategy. While it may be reasonable to accept virtually unlimited losses by selling calls for a $2 premium, it may not be reasonable to continue holding the trade if the options decline to $0.05 each. Thus, many people close low-priced short options trades early by buying to close, and many brokers incentivize this risk management decision by reducing commissions for such trades. E*Trade is not one of those brokers.
A multi-leg options trade might involve simultaneously selling puts and buying calls. Image source: Getty Images.
Options research tools
Although discount brokers are known for providing low-cost trades in exchange for no-frills service offerings, many, including E*Trade, make research and trading tools available to their clients for free.
E*Trade offers a proprietary options screener and strategy optimizer to help investors visualize potential profit and loss on simple and complex trades. Its probability calculator can also help investors determine the risk-reward trade-off with each options trade, including multi-leg options trades.
Minimum deposit requirements for options trading
E*Trade has a cash account minimum of $500 for opening a new account. Some options strategies that expose the investor to larger risks (writing naked puts or calls, for example) require larger account balances, but the requirements for more sophisticated trades varies by the size and risk of each options trade.
E*Trade as an options broker
Every broker has a pricing schedule and feature list designed to court a specific type of investor. E*Trade may appeal to some investors with its relatively low minimum account requirements, single base-rate charges for multi-leg trades, and lower commissions for more-active traders. Investors who tend to trade more low-priced options or transact in short options trades may prefer a broker that allows clients to close low-priced short options trades for free.
To be clear, The Motley Fool does not endorse any particular brokerage, but we can help you find one that is a good fit for you. Check out theFool.com Broker Centerto compare several brokers on one page and to see if you qualify for extra perks just for opening an account.
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