Based on a survey done by the Australian Investor Association on its members, the most popular online broker for shares is CommSec followed by E*TRADE. As our income strategy involves using shares and options, it makes sense to use the same broker for both. If you already have a share trading account, I am sure you would prefer to use the same broker for trading options. Fortunately, all the popular online share brokers do have option trading facilities and I have option trading accounts with CommSec, E*TRADE and Westpac Online. Below is a comparison of these 3 brokers based on 5 considerations that are important for people who use options for income generation:
1) Cash Management Integration
As our income strategy involves our capital moving seamlessly from cash to stock and vice-versa, we need a trading account that has a tightly integrated interest bearing cash management facility. Westpac Online provides a Cash Investment account that currently pays a standard interest rate of 4.25% and if you settle more than 3 trades a month, you get another 0.9% bonus interest which gives you a total of 5.15% of interest for cash that you set aside for covering the put options that you have sold. CommSec also provides a Cash Investment account that pays a higher standard rate of 4.75% but you cannot settle trades with this account so you need to move cash from this account to a non-interest bearing Cash account to settle trades and to cover margin requirements. E*TRADE’s Cash Investment account pays a tiered interest rate starting with a mere 0.10% for the first $50,000.
2) Options Trading Platform
All 3 brokers provide reasonably user friendly trading platform that are good enough for trading simple option strategies like the ones used in our income strategy. Westpac Online has a similar option trading platform to CommSec which is adequate if you mainly sell liquid options i.e. options that have a lot of trading volume, which is what we recommend. Some less liquid options have no market prices and if you wish to sell those, you would want to know the theoretical price or the ASXC‘s value for the option. The theoretical price can be obtained from the ASX website but currently E*TRADE is the only broker that provides the theoretical price and ASXC’s valuation for an option on their trading platform.
3) Option Assignment Process
For put option sellers, how a broker handles option exercise or assignment is also very important. When an option contract is exercised, both Westpac Online and CommSec follow the ASX stock settlement deadline of T+3 days but E*TRADE expects to see the cash in your trading account on the same day you get notified of the option assignment. This is normally not a problem if options are exercised on the option expiry date but could be a problem if your options are exercised early and you are unaware that you have been exercised. If your money is not in the account by their own designated deadline, they reserve the right to sell any stocks they choose from your account to cover any cash shortfall. This can be quite disastrous when there is a temporary market panic!
4) Brokerage Costs
Brokerage charged by Australian brokers for option trades in general is very expensive compared to US brokers. CommSec has the lowest brokerage, followed by Westpac Online and E*TRADE.
5) Margin Requirements
Option sellers are required to provide collateral (cash or stock) to cover margins. ASXC determines what this margin is and brokers are allowed to add on a buffer margin on top of the ASXC margin. Both CommSec and Westpac require 1.5 times, and E*TRADE require 2 times the ASXC margin. Interest is not paid on any cash that is used to cover margins. Hence it is beneficial for you if the broker margin requirements are lower so more of your cash can continue to earn interest for you.
The broker that best meets my requirements for trading my income strategy is currently Westpac Online. However, this may change if other brokers upgrade their platforms and their processes in future. Below is my current rating of the three brokers: