Covered calls are a great low-risk strategy to generate a predictable income from an existing portfolio. By selling call options against stocks that you own, you can generate an income above and beyond equity dividends and recoup some losses if the stock declines in value. The only “cost” is opportunity cost if the stock rises above the strike price.
Many retirement investors don’t have experience with covered calls and others may not even have a brokerage account setup. Unlike stocks, options require a special agreement with your broker and have their own commission and fee schedules. Some brokers even provide unique tools and research to help you identify profitable option trades.
In this article, we will look at how to choose the best brokerage account for covered call options.
What Is a Good Broker?
Choosing the right broker depends on your individual circumstances, but there are some attributes that good brokers share.
High-quality option brokers share several characteristics:
- Low Fees & Minimums: Fees can have a significant impact on long-term performance. At the same time, some brokers may require you to deposit tens of thousands of dollars, which can be a dealbreaker for smaller investors.
- Options Focus: Many brokers offer some options trading functionality, but it helps to sign up with a broker with option-specific capabilities. That way, you can benefit from better tooling, pricing, and resources.
- Customer Service: Sooner or later, you will need help from your broker with some type of complication or problem. When this happens, you will want a good, knowledgeable support team to resolve your issue.
- Reputation & Financial Stability: This is very likely your life savings or a good portion of it. Trusting it to an app developer may not be the best idea. Depending on the securities and type of account, a broker will have insurance through the FDIC and SIPC. Most carry additional insurance through a private provider to add extra protection for their account holders.
- Trade Execution: This is one of the most important but hard to define benefits of a good broker. Their ability to execute trades at a better price can add up to thousands of dollars over the years. This factor is even more important when trading options.
Commissions & Fees
There’s no doubt that commissions and fees have a significant impact on investment performance. For example, a trader placing 12 covered call trades per year might pay $250 in fees. Cutting this cost in half will save you thousands of dollars over many years and the savings will be invested for compound growth.
Brokerage accounts charge a variety of different fees, but the most obvious fees are commissions. Commissions are charged each time a trade is executed—including both buying and selling transactions. Most investors are familiar with stock commissions, but option commissions typically involve two fees—a per-trade fee and a per-contract fee.
Option trades typically involve paying a fixed fee per trade, ranging from $3.00 to $7.00, and a variable fee based on the number of contracts, ranging from $0.15 to $0.75 per contract. A trade consisting of five contracts could therefore cost between $3.75 and $10.75, depending on the commissions charged by your specific broker.
There are also several other types of fees that brokers may assess, including service fees, regulatory fees, and market fees. It’s important to consider all of these different fees when choosing the right brokerage.
- Statement Fees
- Account Transfer Fees
- Wire Transfer Fees
- Section 31 Fees
- Options Regulatory Fees
- Trading Activity Fees
- Level I and II Quotes
- Research Subscription Fees
Brokerages offer both software and research subscriptions to help traders identify potential opportunities. If you’re using an option strategy like The Snider Method, you don’t have to worry about these features since there’s already a well-defined strategy in place to identify opportunities. But traders starting from scratch might need these tools.
The most helpful trading software for covered call option trading are option screeners. These screeners help traders automatically identify opportunities based on a specific set of criteria. For example, Snider Advisors has a free screener that you can use to find both weekly and monthly covered call positions. Check it out here: https://www.snideradvisors.com/free-covered-call-screener/.
Research subscriptions could also be valuable for active traders. In addition to daily market reviews, these subscriptions help traders find more subjective opportunities in the market. TDAmeritrade’s MarketEdge, for example, provides a daily analysis on 4,000 stocks.
It’s important to weigh the cost of commissions with the features that you need to find trading opportunities.
There are many different brokerages for options traders. Most of the dedicated providers, such as OptionsXpress (acquired by Charles Schwab) and OptionHouse (acquired by eTrade), have been acquired by larger companies, which has limited the choices.
We recommend Ally Invest for our clients because of its low cost, great options trading platform, and excellent customer service. Ally Invest was formerly known as TradeKing before being acquired in 2016. While it’s one of the new companies in the space, the broker offers steep discounts for active traders and has unparalleled 24/7 customer service. Learn more.
Ally Invest Options Trading – Source: StockBrokers.com
Charles Schwab is another reputable brokerage that provides high-quality educational resources for new traders. With no account minimums and reasonable commissions, it’s the perfect account for those that are just getting started with options trading, particularly following its acquisition of OptionsXpress.
If you’re a more advanced options trader, TD Ameritrade has a fully featured platform and high-quality research for customers. While its commissions are higher, active traders may find that the cost is worth having access to high-quality tools and resources, including the MarketEdge service.
Interactive Brokers is the best option for advanced, very active traders seeking the lowest costs. While account minimums are higher, traders pay $1 per trade and just 70 cents per contract, and have access to the latest trading tools to research their trades, such as one of the leading screeners in the market.
Some other popular brokers to consider include:
Many traders are tempted to use free services, like Robinhood, but the service has experienced some issues in the recent past. While cost is certainly a big consideration, execution, reliability, and customer service are often more important over time.
The Bottom Line
Covered calls are a great way to generate income from an existing stock portfolio. When choosing a broker to execute these strategies, traders should consider both commissions and account features. The good news is that there are many different options available.
If you use a strategy like The Snider Method, you can confidently select low-cost brokerages to realize the best of both worlds—low costs and a reliable strategy to generate an income during retirement.
For more information, take our free online course to learn more about covered call options and how The Snider Method can help you generate a reliable retirement income.
Snider Advisors has an economic incentive for recommending that clients open an account with Ally. Specifically, Snider Advisors receives a flat referral payment for each new account it refers to Ally. More detailed information about the relationship and our fiduciary responsibility can be found in our ADV Part 2A. Clients may contact Snider Advisors with any questions about the terms of the Agreement with Ally.