Looking for an easy way to increase your trading profits? There are a few easy steps that can give your bottom line a boost. In fact, these steps should be followed by everyone regardless of account size or experience. It’s always amazing to me when I get a monthly or year end broker statement just how much money I spend on trade costs.
In the heat of the battle paying $1 per options contract traded doesn’t sound like a lot. However, add that up over thousands of contracts over the year and it’s a significant number. This is why you should consider other broker options to make sure you are paying a low commission rate.
We will talk more about this in a moment.
The second area that you can focus on is trade execution price. Being picky on your order prices can also add up to big savings at the end of the year. These two areas are crucial to address if you want to improve your results. Let’s take a look at how it’s done.
Commissions are a necessary evil in the trading game. We have to pay someone to place our trades each day. In many cases, newer traders research different brokers to find out who has the cheapest rates.
I recommend that you stay open to different broker options. While it can be a pain to open up a new account, you might be surprised how much money you can save by using a different broker. For example, TD Ameritrade charges around $6.95 + $.75 per contract for a standard commission rate for an options trade. TastyWorks on the other hand charges a flat $1 per contract commission and they only charge a commission to open a trade. There are no closing commissions.
Taking 100 trades a year with 5 contracts on each trade through TD Ameritrade would cost $2,140 in commissions. Taking those same 100 trades with 5 contracts on each trade through TastyWorks would cost $500. That is $1,640 of cost savings just in commissions alone. All from choosing a different broker to take the trades with.
The second area that can lead to easy savings over time is in your order executions. My main area of focus in my personal trading is the options market. Options are great products to trade because of the flexibility that they offer and the great liquidity that is found in many stocks and ETF’s.
Like all other markets, there is a bid price and an ask price when trading options. The difference between these prices is known as the bid/ask spread. Often times, traders will go in and just pay the full ‘ask’ price when buying an option. This is an easy way to get a quick fill on a trade. The problem is that by doing this you could potentially leave thousands of dollars on the table over time.
Let’s take a look at an example.
Let’s say we are looking to buy a call option on Goldman Sachs (GS) to play a move higher in the stock. We go into our broker platform and see that the 175 call is trading for $8.95-$9.50. This means the bid price is $8.95 and ask price is $9.50. There is a $.55 difference between these two prices. This is the bid/ask spread. If we wanted to pay full price to buy this call we would pay $9.50 or $950 per contract. The problem is that we could potentially get filled at a cheaper price.
I like to teach my students to try and place their orders at the mid price between the bid and ask. We just mentioned there was a $.55 difference between these prices. If we try and split the difference we would place our order to buy at $9.25 instead of $9.50. This would give us a $.25 savings or $25 per contract! All we did was change the price of our order.
Why wouldn’t we do this on every trade?
The problem with this approach is that by placing the order closer to the mid price we aren’t guaranteed an instant fill. We might have to let the order work for a few minutes before getting in the trade. Some traders aren’t patient enough to do this. In my opinion, it’s well worth the time. If we aren’t filled at the mid price, then we can adjust the order up by $.05. We would still be saving $20 per contract.
If we add up a $25 savings on each trade over 100 trades that’s a $2500 savings right there. That is only on one stock. Start to do these figures on a watch list of 20 different stocks and you can see that this is a significant savings over time.
Sometimes we get so focused on finding the perfect system and perfect market to trade to try and boost profits that we overlook some of the basics sitting right in front of us. A simple change of broker can lead to $1,640 in savings on the commission side (like we talked about earlier). Being picky on what price we place our orders at can lead to $2500 savings over 100 trades. This is based on trading one contract. That’s $4,140 of extra profit that you could add to your trading account.
So why don’t we all do this?
Most traders don’t like the thought of having to fill out all the paperwork when opening a new brokerage account. It takes time not only for the paperwork but also to fund the account. On top of that, most people don’t have the patience to try and get in and out of trades at good prices. Working their orders takes time and many of us want things as easy as possible.
The bottom line is that we are all trading because we want to make money. These are easy ways to help you make more money with very little effort. I would highly encourage you to take advantage of these ideas and enjoy the boost to your bottom line.