How to Choose a Futures and Options Broker
4 of 10 in Series: The Essentials of Futures and Options Trading
If you are interested in trading options but aren’t sure about your own ability to trade them, you need to find a good options broker/advisor to help you out. A broker can assist with strategy development, research, monitoring open positions, and working orders.
A futures broker usually can handle your options activity as it relates to futures and may be able to handle stock option transactions. If you want to do all that stuff yourself, then you just want to get access to the markets through the lowest cost medium, usually an online discount broker.
Con artists and unscrupulous advisors lurk around every corner and prey on the unsuspecting and uninformed options trader, so do your homework. When selecting a broker/advisor, be sure to ask these important questions, which are applicable to broker and advisor candidates for online and managed accounts:
What kinds of services does the brokerage firm offer? If you decide to establish a managed account, make sure early on that you’re getting your money’s worth. Aside from getting good results, you’re paying for customer service. Most advisors will meet with you at least on a yearly basis. Many meet with you on a quarterly basis. If you’re an active trader and your advisor calls you with trades frequently, make sure that he’s giving you winning trades. Otherwise, he’s probably churning your account.
What commissions and other costs are charged and under what circumstances? As part of your search, compare fees and services between the different advisor/broker candidates, and match their results with their costs.
How experienced in options trading is the broker who was assigned to you? Consider years of experience and track record of successes.
Is your broker registered with the Commodities Futures Trading Commission (CFTC) or National Futures Association (NFA)? This is applicable to options on futures only. For stock options, the Financial Industry Regulatory Authority (FINRA) and Chicago Board Options Exchange (CBOE) memberships are critical.
What kind of results can you expect from the broker assigned to you? Be careful of financial advisors that advertise instant riches based on small amounts of money and promise that they will return all of your money. No one can make such a promise. Also get to know who’s doing the trading and what methods they’re using before you give them any of your money.