brokers point of view to options trading

Discussion in 'Options' started by AK(m), Mar 22, 2012.

  1. AK(m)


    i am newbie on the forum and options. My broker have told me that options trading is more risky in comparison with futures and reccomended me to have at least 25k $ on account to trade options. I suppose it was not a full truth and the main reason is that active futures day traders are most attractive clients for any broker. Option traders can not make good profit for brokers and that was the main reason. Am i right?
    thanks in advance
    Excuse me english is not native for me.
  2. rwk


    I cannot speak for your broker, but I realize that some are not very reputable and may be too concerned about earning commissions. In general, both futures and options are considered risky because they are more highly leveraged than more familiar investments such as stocks and mutual funds. Learning to manage leverage requires diligent study. Many beginners fail to exercise sufficient caution.
  3. wayneL


    Just a point, but there is no law that says just because leverage is available, that one must use it.

    If sensible money management principles are used (eg 2% fixed fractional), it will save one from getting into too much trouble from leverage.
  4. VielGeld


    Broker's point of view?

    "Milk them through commissions, baby!"

    Seriously, commissions on options are just ridiculous. That's where the large majority of your losses are likely to come from.

    As for risky, eh. Not really. It depends on the leverage of the instrument and you account size. Taking ES for example, if you have $1000, then 1 tick = ~1%, and 1 point = 5%.

    So it's best if you have at least $5000 for ES since then 1 point = 1%. Much more manageable.

    As for options, just... don't touch them. They plain suck for trading, 'k? You're just going to get milked for commissions. That's been my experience, anyway...
  5. So, a retail broker has two issues.

    1. How do I make commissions?

    2. How to I prolong the life of this client so that I make more commissions?

    The first point is pretty simple. Point the client to products with higher commissions, and sell it to them by explaining the added upside, be it through leverage, or maybe the notion that this is a “special deal” in some way, access to something not all clients get etc.. This is short term stuff. Earn superior commissions before they blow up and go away.

    The second point is a bit trickier, and involved the broker possibly working for the same team as the client to some extent. If the client doesn't blow up fast, then maybe there's some longer term commissions to be earned. In this situation the broker is probably putting you into products with less leverage, but hopes you'll trade a lot, and do so for some time, only eroding your capital gradually. With lower leverage, you'll probably bleed to death rather then outright blow up.

    Regarding futures vs options, it depends on which option & whether you're buying or writing them.

    Perhaps the simplest metric is to compare the volatility of the instrument to the transaction cost, to figure out just how bad a deal your commissions are. But that may be to complex an answer.

    What's your objective? – Other than “to make money” through trading.
  6. Answer to OP:


    Commissions are high. And I think PFOF is good too. That's why every broker wants options traders.
  7. Ah, come on, surely retail trading costs have to be considered with respect to how much the stuff moves.

    For example, don't pay a big commission to directional day trade way OTM options, but perhaps do pay a big commission to day trade oil futures.

    If you're into that kind of directional stuff.
  8. .

    Yeah. I personally think that if commissions are a big source of pnl slippage you aren't doing the right strategy.

    If you are paying 5% of your target gains in commissions that's one thing. If you are paying 30% that's another.
  9. Yup. The spread should be the problem .. or the solution :p
  10. receiving that spread would be awesome.
    #10     Mar 23, 2012