In today's post I want to analyze the commissions schemas of brokers who operate in Canada. I will only look at commissions applied to options trading activity and how they affect traders on this side of the border. This is not a post to discuss who has the best trading platform, or the best customer service. It is just a starting point to quickly rule out some brokers, if you are an options trader who focuses on multi-legged positions or monthly income trades (Credit spreads, Iron Condors, Calendars, Diagonals, Butterflies etc)
Sadly, we are far from being as lucky as folks south of the border. There's no broker, none, who offers cheap commissions schemas such as OptionsHouse or TradeMonster etc. There's none. I believe it is somehow related to the much smaller population and obviously trading community up here. Think about it, if you are a brokerage firm operating in the US you have a larger pool and potentially a larger clients base to operate, whereas doing business up here kind of doesn't make much sense as there's only a comparatively much smaller community and the firms still have to go through yet more paper work, legal stuff, fees, regulations etc. Maybe it is not worth the hassle unless they make it worth by applying higher fees.
The second reason I believe is competition. There's just a bunch of fishes here, the US on the other hand is an ocean of brokers. If there's less competition,....well, you get the idea.
I'm going to mention some of the most popular online brokers, and analyze how much a typical trade, like the ones I make, would cost with each one of them. The sample trade is a two point wide SPY Credit Spread where I receive a 0.30 credit, against an 1.70 margin or max risk. 15 contracts per leg:
Sell 15 SPY 150
Buy 15 SPY 152
Total number of contracts: 30
Maximum return: 0.30 * 100 * 15 = $450
Margin: 1.70 * 100 * 15 = $2550
$1.50 per contract. Minimum of 14.95$ per transaction. That is, if you only trade 1 contract, you have to pay $14.95 because that's the minimum per transaction. From 10 contracts on, you simply multiply by $1.50 per contract.
The sample trade would result in a commission of $45 to enter the position (30 contracts * $1.50), and another $45 fee in order to close the transaction. Total $90.
Obviously, this is a very unfavorable schema, that eats up 20% of your profits assuming all your trades are profitable, and all of them achieving max profitability. Obviously that won't be the case. So, normally, over time, expect commissions costs to devour 40% of your yearly trading profits.
OptionsXpress has an active trader schema of $1.25 per contract, but I decided to use the standard rate, given, that trading two or three positions per month I will never meet the requirement to be considered an active trader.
ThinkOrSwim Canada (http://www.thinkorswim.ca)
$9.99 per trade + $1.25 per contract
I understand that for US folks, it is simply $1.25 per contract. Well, there you have it, for us Canadians we get a little nice addition of $9.99 per transaction.
The sample trade would be $9.99 + 30 * $1.25 to enter a position, that is $47.49. Same thing to get out of your position and that's a total of $94.98. Nice, I wonder how many people pay $94.98 in commissions in the whole world, to enter an exit a 15 contracts per leg Credit Spread. Obviously, an abusive schema, not good nor advisable for options traders.
Interactive Brokers (http://www.interactivebrokers.ca)
IB is a little more complex in respect with the commissions applied to options. But for instruments traded in the US markets it is pretty clear.
If you trade less than 10000 contracts per month, obviously my case, then you pay:
$0.70 per contract if the contract is worth 0.10 or more.
$0.50 per contract if the contract is worth 0.05 to 0.09.
$0.25 per contract if the contract is worth less than 0.05.
A minimum of $1.00 per transaction must be spent, that is if your commission fee on a particular trade adds up to less than $1.00, then $1.00 will be charged.
Back to our sample credit spread. And assuming both options are priced at something higher than 0.10. The cost would be 0.70 * 30 = $21 to enter the position and $21 to exit. Total: $42.
IB has some other not so nice fees, like fees applied depending on the routing of the order and the exchange where it is cleared. There is also a minimum of $10 in commissions per month that must be met. So for example, if on any given month you don't trade, you will be charged $10, or if your commissions fees are let's say $3 on a given month, you will be charged $7 in order to complete the minimum $10. I also understand there is a monthly fee to pay for the real time quotes you get on the platform, not sure about this though. So, many traders say, that over the long term, considering all different costs, IB is about $1 buck per contract.
$9.95 per trade + $1.00 per contract
For our sample spread $9.95 + 30 * $1.00 = $39.95 to enter the position. $79.90 considering entry + exit.
Virtual Brokers (https://www.virtualbrokers.com)
$9.99 + $1.00 per contract (USD)
$9.99 + $1.50 per contract (CND)
For our sample spread that is $9.99 + 30 * $1.50 = $54.99 to enter and $109.98 considering entry + exit.
Obviously, an extremely unfavorable schema for an options trader.
Analyzing only commissions costs, there is a reduced selection of brokers for Canadian options traders. Overall, the costs are still too high for the average retail trader, and very harmful for small portfolios and traders of complex options positions. Interactive Brokers is by far, the cheapest option, and perhaps the only viable one to trade complex options positions for monthly income.
Of course, this is just analyzing trading costs, like I said at the beginning, we are not considering quality of the trading platforms, nor customer service etc. But at least, for options traders, particularly for those who trade complex/multi legged positions, costs are one deal breaker and obviously one of the most important considerations.
Given that I haven't been a customer of all 5 brokers, I may be mistaken. I went to the websites of the firms and extracted the info provided there. If you detect any error on my article or if there is something you want to add to this topic, please feel free to add your thoughts via the comments sections.