I wanted to share a very simple cost analysis that I do every year regarding my trading activities. As an "active" trader, I really have to take the costs into consideration. Market data and platform fees per month: Tradestation Platform, Tradestation Portfolio Maestro and Tradestation RadarScreen: Free Prof. Market Data: $190 (indices, Globex, Amex+Nasdaq+NYSE real time) TWS (Interactive Brokers) platform: Free Prof. Market Data: $124.25 (Stock & option streaming) Mluticharts: Free (lifetime licence) Yearly commission on trading: Futures: $1,578 (Tradestation) 300 lots Overnight fees $135 (Tradestation) Stocks: $6,412 (IB) 584,652 shares Options: $13,580 (IB) Just simple calls and puts. 9972 option contracts Interests (IB broker paid): $680 (I use high leverage for stocks) Good: Low commission on stocks & very low interest rate Free platforms. Less good: Commission on futures (not the best but free platforms), professional market data fees which are unavoidable. Bad: Overnight fees, no big deal but probably avoidable. Options: Even at $1.36 per contract, need to lower the costs. I just found eoption. The option commissions are actually amazingly low. After doing the maths, I should pay: 1092 order X $3 (commission 1) + 9972 option contracts X $0.17 (commission 2) = $4,971. If I go with them for option trading only, I will have won $8,609 more, next year just with this move! Anyway, I just wanted to share this annual review of my costs of trading. Anybody actually know or even trade with eOption? I still need to do some research before I open an account with them. Good trades!
Very nice. But you forget to calculate the most important cost of all. Your opportunity loss. What income and benefits could you have been making doing something else?
Thank you for this overview. As absolute numbers do these costs look impressive/high to me, but I'm only a small retail trader. If you look at these yearly costs relative to your yearly profit, are these costs a high percentage?
This isn't a real cost. Period This is the false flag flown by hindsight to remind you how much better you could have done if only you could travel back in time. It's the enemy of every trader and should be excised from your lexicon. The one thing hindsight is good for, is if your trade looks good with hindsight, it was probably a bad trade, ill considered, with too much risk.
Strange day, i seem to be posting 606 disclosures all the time: http://www.eoption.com/wp-content/u...d_forms/other/2017_01_SEC-Rule-606-Report.pdf
It's good to do this analysis, and good to think about how you can reduce your costs, but it's also meaningless to look just at the $ cost without knowing what your account size and risk or return target is. I can't be bothered to add this up, but your total $ cost looks like it's about $25,000 a year. Now that sounds like an awful lot of money to me, but you might have a $10 million trading account, in which case it isn't. You may also want to include your market impact / slippage, as again this is a cost you will pay regardless of whether your trading is profitable or not. Let me share my own figures and explain how I'd think about them: Commissions £3,120 (almost entirely in futures) Data £120 Net interest £600 Slippage £2,240 Total: £6,080 Even allowing for currency conversion you can see why I was horrified by your figures (and they don't even include slippage). Now let's calculate those as a % of my notional account size (£400K): Commissions 0.78% Data 0.03% Net interest 0.15% Slippage: Total: 1.52% That is 1.52% I have to make every year before I become profitable. Your costs (around £20,000) would equate to 5% of my account. That sounds like an enormous amount. Or to put it another way, I run my account at a target risk of 25% a year. So in risk units I have to make 1.52 / 25 = 0.061 Sharpe Ratio points a year before I pay my costs. A fairly pessimistic guess at my long run Sharpe is 0.5 (equating to a return of 12.5% a year). So I'm giving up about 12% of my likely return in costs. If I was paying £20K a year in costs then I'd be giving up 40% of my returns in costs. That's ridiculously high. That is the kind of units you should think about costs in. This isn't what opportunity cost is. Opportunity cost is the fact you really ought to charge yourself the money you could have earned if you weren't trading. You should also count the money you could have earned if you had invested (the opportunity cost of capital, with a commensurate level of risk as you have in your trading). To take an example; an extremely successful day trader with a $100,000 stake might make an average of a 100% return a year, with a standard deviation of 20% - similar to the US equity market. They also have to pay $20,000 in commissions, but that still leaves them with $80 grand. However to get these returns they need to spend 10 hours a day shackled to a desk trading and researching for the next days open. If they weren't doing this they'd be holding down a white collar job with a $75,000 salary. I'll assume that the tax on trading and salary is the same but obviously you can factor that into your own calculations. If they weren't trading then they could passively invest in the US stock market and earn an average of, I don't know let's be pessimistic, say 8% a year or $8,000. That is their opportunity cost of capital. So their real return from trading is $100,000 -$20,000 - $8,000 - $75,000 = .... well it's negative. They would have been better off working for a living, and investing passively. If I look at my own account (notional value £400K) then the opportunity cost of capital is around £32K. But because I trade in a fully systematic fashion I only spend an hour a week on it. Even if I assume I would spend that hour doing consultancy at my highest day rate that only comes out to £13K. So I really ought to be earning at least £45,000 a year to make it a worthwhile exercise. GAT
I am a discretionary trader. I day trade with 5% of my trading capital and swing trade (about 3 to 15 days) with the rest of it. My day trading costs are about 40% of my total costs and represent 15% of my profits. I day trade with options. 85% of my option costs are for this day trading activity. Year 1: -15%, Year 2: 75% and Year 3: 64%. So far this year is seem to be the best with 59% yet. Before thinking that is just not possible, please do the maths: What if you trade 1 day per year and are right, like the 5/05/2017 with a SPX range of 20.25 points? Trying to identify my losing days and get rid of this kind of days (meaning no day trade those "bad" days) are how I reduce my option costs and improve my P/L. I still have a lot of work to do! This kind of day trading is not really time consuming. But I do need to be near my screens. My swing trades are time consuming, about 2 hours of research and trades every day. So far, every year I take about 60% of my profit out of my LLC, spend half of them and invest the rest mostly with hedged index ETFs. For the past 2 years I transitioned from my previous activities to this one. By the end of the year I will be 100% dedicated to it, and to be fair not for just 75K / year. Anyway, if one "professional" day trader successful or not is on Elite, she or he hopefully understands how high the trading costs can be and the necessity to think like an entrepreneur and not just as a trader.
Thanks for this disclosure. I want to use them to trade options only, and obviously with limit orders.. I am not sure I will have worst executions than with IB. Nobody here tried them yet? Any other low cost option broker like this one?
I agree with the assessment that opportunity cost should not be considered. With any career you choose, there is always an opportunity cost since you clearly could be doing something else with your life. Is money the only way to measure that opportunity cost? My point is that because it is a consideration in every career choice you make, and is not uniquely a cost associated with trading, it should be excluded. Furthermore, you shouldn't be pursuing a career where money is your primary motivation. You should instead choose a career that you can be really passionate about. Of course, for some, money does maximize this passion, and that is perfectly ok. With passion, your motivation is maximized, improving your chances of success.
Perhaps 'cost' is the wrong word, but it's clearly nuts for someone who could be earning a six figure salary in a corporate job, plus a passive investment return of $8K on $100K, to give it up to earn $50K day trading. And that should come into your calculation as to whether what you are doing is financially worthwhile. Think of yourself as an asset (what economists call "human capital"). If you deployed that asset in the workplace you'd earn X. Similarly if you deployed your investment capital passively you'd also earn Y, for a given level of risk. If your return (net of 'proper' costs) isn't greater than X+Y then you've made a bad financial decision. Of course I accept that there may be lifestyle reasons why you'd prefer to work at home for yourself (no commute, not having to deal with assholes, working with only your boxer shorts on... okay that's just me). If those benefits make up for the loss of income then that's wonderful. After all I'm currently earning about a quarter of what I could be making if I was still working, but I'm a lot happier. And yes, it's not unique to trading. Naturally the same is true if you choose a poorly paid career over another that might pay more, but be less rewarding or interesting. GAT