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How much should I think about commission and liquidity costs?

Discussion in 'Options' started by runmael, Apr 14, 2016.

  1. runmael

    runmael Member

    I know that I should take into consideration commission and liquidity costs (bid-ask spreads) when considering placing a trade, however I am not sure how much should I worry about those? For commission I can pick broker with lower fees and try to negotiate better price, and for liquidity I can limit myself to trade only highly liquid options. Is there anything else here that I should worry about or do?

    How do you estimate these costs and account for them when trading?
     
  2. Gabor Maly

    Gabor Maly Well-Known Member

    I do not know your background but assuming you are starting out this topic should be lower on your list. Get good (rather should say great) at execution first this will save you so much more in the long run than the savings you will get from moving from 1 dollar to 0.75 cents. Some people will stick with TOS (yes they do negotiate better than default rates) and pay higher commissions as the platform gives them an edge over an IB or other platforms.
    Once you have a large number of trades on your belt you can dive into commissions and look at not only a default commission rates but also which exchanges that your orders are channeled to will give you the best fills.
     
    runmael likes this.
  3. Andrei

    Andrei Well-Known Member

    Commissions is the most obvious expense and the easiest to compare. Obviously, lower commissions are desirable, but must be weighted against two other potential sources of expenses: execution and user mistakes.
    Some brokers, like IB stake their reputation on good execution and depending on what you trade it may give you an edge.
    Some brokers like TOS have an integrate platform with many analytical tools built-in, which make trading more intuitive and less prone to mistakes. And speaking from personal experience, one mistake can wipe out all your commissions savings and more.

    I have tried Trade Monster (now OptionsHouse), IB and TOS. TM had the best rates (may no longer be available though), but not a very good platform (not sure about thierexecution); IB has good rates and good execution, but a difficult interface, TOS has average rates, I think pretty good execution and good platform.

    So for now I am trading with TOS, may be try IB again for some strategies.
     
  4. runmael

    runmael Member

    Thank you for the answer. What about the liquidity, how do you handle that?
     
  5. ACS

    ACS Well-Known Member

    Liquidity as conventionally defined is more an exchange issue although there are claims that some brokers can get fills faster or easier than others depending on how their orders are routed.
     
  6. runmael

    runmael Member

    Yes, but liquidity as the spread between the bid and the ask is something that is changing through time. There are periods of higher (narrower spread) and lower liquidity that impacts trade cost itself. Is this an issue for anybody?
     
  7. Andrei

    Andrei Well-Known Member

    Liquidity is a function of traders' interest, not something you can manage. If you want more liquidity, select more popular underlying securities, strikes with more open interest (i.e. 25 strikes in SPX) and (usually) closer expiration and ATM contracts. Some brokers maybe able to give you better executions even with less liquid contracts, but I all I have is anecdotal information:).
     
    runmael likes this.

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