Stock options are more than just a way companies pay their workers. Investors can buy and sell stock options to hedge their portfolio, generate income from covered calls, and speculate on short-term moves in stock prices to earn higher returns on their investment. As some brokers prioritize options trading over other types of investing, it's important to pay attention to the details before opening a new brokerage account.
Continue Reading Below
Let's review how Interactive Brokers compares for investors who want to use stock options in their portfolio.
Standard trading commissions
Interactive Brokers uses a variable commission schedule that makes it stand out in the world of stock and options trading. Rather than pay a mostly fixed rate, Interactive Brokers' commissions vary by trade size and the value of each option.
Data source: company website.
Importantly, Interactive Brokers also offers a variable commission schedule under which options, stocks, and ETFs can be traded at even lower prices. Commission prices generally decline with volume, which is advantageous for its most active clients. Learn more about special offers for opening a new account, which can add up to thousands of dollars in value in the form of commission-free trades and cash bonuses.
Multi-leg options and exercise and assignment fees
While it's relatively straightforward to buy a call or put option, some strategies require simultaneous orders of different options contracts. The long strangle optionstrategy requires the simultaneous purchase of a call and a put option, for example. Depending on your broker's commission schedule, these options trades can become costly, and quickly.
Data source: company website.
Interactive Brokers' commission and pricing schedule is designed to benefit traders who make use of complex strategies, or who intend to hold their options to exercise or assignment. The broker doesn't charge a fee when options are exercised or assigned, and its commission schedule offers lower prices for low-priced options contracts. It is one of a few brokers that don't charge for this occurrence.
People who use covered calls, for example, would prefer a variable commission schedule like that offered by Interactive Brokers, as commissions decrease with the price of an option. When you write a covered call, you are effectively shorting an options contract. As the options contract declines in price, buying to close the position will incur a smaller commission. For example: You might pay $0.70 per contract to write covered calls worth $1.00 each. Later on, the option price might fall to $0.05 per contract, at which point you'd pay a commission of just $0.25 per contract to buy-to-close the contract.
Similarly, those who want to buy low-priced puts or calls will pay a lower commission to do so, resulting in commissions that make up a lower percentage of the amount invested.
Interactive Brokers' stock option commissions decline with the price of a put or call option. Image source: Getty Images.
Options research tools
Although discount brokers are known for offering less in the way of research and support, many offer free access to research and trading tools designed to help their investors make better investment decisions. Many of these tools come free just for having an account.
Interactive Brokers' Options Analytics tool allows you to explore an options contract from the perspective of profitability, max gain or loss, and view the "Greeks," which are automatically calculated next to each contract. These tools can be especially useful for investors who use more sophisticated options strategies.
Minimum deposit requirements for options trading
Interactive Brokers currently requires a $10,000 minimum deposit for most investors, although this minimum is decreased to $5,000 for IRAs, and $3,000 for individuals who are 25 or younger.
After making a minimum deposit, investors will be able to complete basic options trades. More complicated strategies and those that involve higher risk -- selling naked puts or calls -- will typically require a higher equity balance, and minimums are subject to change depending on the brokers' assessment of the risk of each trade.
Keep in mind that Interactive Brokers waives minimums on accounts with a balance of $100,000 or more. However, for those who don't meet the minimum account balance requirement, Interactive Brokers requires that traders generate at least $10 in monthly commissions.
Accounts that don't meet the minimum trading volume requirement will have their monthly commissions automatically rounded up to $10 during that month. For example: A client who spends $5 on commissions in one month will see an extra $5 fee added on during the month to bring that person up to the minimum commission level. This may make it less attractive to people who don't intend to keep a high balance or don't anticipate trading frequently.
Interactive Brokers as an options broker
Interactive Brokers is designed with the active trader in mind. Its commission schedule favors active options traders, as well as those who hold options until exercise or assignment, as it doesn't charge a fee for either event. That said, its higher minimum deposit requirement as well as inactivity fees ($10 minimum monthly commissions) may not make it cost effective for the infrequent options trader.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 all on one page and to see if you qualify for extra perks just for opening an account.
10 stocks we like better thanWal-MartWhen investing geniuses David and TomGardner have a stock tip, it can pay to listen. After all, the newsletter theyhave run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tomjust revealed what they believe are theten best stocksfor investors to buy right now... and Wal-Mart wasn't one of them! That's right -- theythink these 10 stocks are even better buys.
Click hereto learn about these picks!
*StockAdvisor returns as of April 3, 2017The author(s) may have a position in any stocks mentioned.