Which broker is the cheapest?

If our intent in investing is to generate a profit, then it is prudent to reduce our expenses as much as possible. One of those expenses is the commission on our trades and any monthly or annual fees.

Depending on your chosen strategy and account type, one broker might be better than another. I’ll be looking at this from the point of view of implementing the No Lose Stocks (NLS) strategy in a Traditional IRA account. The NLS strategy requires buying 100 shares of stock and 1 Put option contract on the same stock.

Broker summaries

Here is a summary of the pertinent data for each of the 4 brokers I considered:

Zecco (http://www.zecco.com):
– Stocks 10 free trades per month
– Options $4.50 + $0.50 per contract
– $30 account fee for IRAs (each account!)
– 0.1% interest on balances

TradeKing (http://www.tradeking.com):
– Stocks $4.95
– Options $4.95 + $0.65 per contract
– No IRA fee
– 0.9% interest in sweep money market account

Fidelity (http://www.fidelity.com):
– Stocks $10.95
– Options $10.95 + $0.75 per contract
– No IRA fee
– 2.45% interest on balances

InteractiveBrokers (http://www.interactivebrokers.com):
– Stocks $.005 per share which is about $0.50 per 100 shares, with a $1 minimum
– Options $0 + $0.70 per contract for > .10, .5 to .10 is .25 to .50 per contract. $1 minimum.
– $10 fee per month ($120 per year per each account), less transaction fees.
– 1.5% interest on balances greater than 10k

Fidelity vs. Trade King

Trade King beats Fidelity if you are only making one NLS trade per year. Trade King costs $10.55, while Fidelity costs $22.65.

Unless you are planning to keep a large amount of cash in a money market Fidelity seems to be a bad choice for the NLS strategy. Their higher money market interest rate is their only saving grace. But since my positions are completely protected by the Puts, I will be keeping as much of my money invested as possible to expose my portfolio to as much positive luck as possible. So I won’t be generating interest income.

Trade King vs. Zecco

Trade King beats Zecco for less than 6 trades per year. At 6 trades per year, Trade King would cost $63.30 and Zecco would cost $60. The average trade using NLS requires about $6500 and lasts for 4 months. With 6 trades per year, that’s about 2 trades per 4 months, which would require a maximum of $13000 in capital. So if you’re planning to invest more than $13000 using NLS then Zecco is better than TradeKing.

Zecco vs. Interactive Brokers

Interactive Brokers (IB) charges $2 per NLS trade with a minimum of $10 per month. So if you only do 1 trade in a month, then you pay $2 in commissions plus $8 in remaining fees. If you do 6 trades per month, then you just pay the $12 in commissions. So with 6 trades per year and 2 trades every 4 months that means you’re paying the minimum $10 each month. So that’s a total of $120 per year for IB. At that number of trades Zecco is still the better choice.

Zecco hits $120 at 18 trades per year. Assuming you split the trades up between months to be no more than 5 in a given month (or at least evenly split if more than 5), then at 18 trades or more per year, Interactive Brokers would be the cheaper alternative.

If you staggered the purchases to be 3 NLS trades every 2 months for a total of 18 trades in the year, and the average capital needed to fund a trade was $6500, you could do this with $39000.

Conclusion

So if you’re going to be investing in the NLS strategy with $39000 or more, Interactive Brokers seems to be the best choice.

Their software is a little complex, but once you figure out how it works, things move quickly.

If you need help, the NLS strategy is a specialized form of a “Synthetic Call” and falls under their “Combination” trades. So you can actually enter the stock and the Put you want and the total limit price you want to pay for both combined, then let IB go put the deal together.

Example Trade

I’m going to run through an NLS trade that I placed on this past Friday. I’m not recommending this stock. In fact, I’m not making any judgments about this stock at all. The whole point of NLS is that I am admitting that I don’t know what is going to happen, so I place multiple bets that have little to no downside and wait for one or more of them to hit. This is what I mean when I refer to fishing for luck.

The trade as reported in the NLS output on Thursday night was:

Stock: HNZ
Close: $51.38
Expected Dividend: $0.42 in December

Option: HNZML
Ask: $9.00
Strike: $60.00
Expiration: 1/16/2009

So I put in a limit order for ($51.38 + $9.00) $60.38. With 100 shares that requires an investment of $6038.00. Assuming the company does not cut their dividend, I expect to get a $0.42 dividend in December. So the minimum that I expect to get when I sell this stock is $60 plus the $0.42 dividend. That’s a ($60.42 – $60.38) $0.04 profit per share. At 100 shares, I should get $4.00.

Since I placed this trade with Interactive Brokers, the cost was $2, so I should net ($4-$2) $2 even if the stock goes down. That’s assuming they don’t cut their dividend. If they for some reason decide to cancel their dividend or pay it much later, then my maximum loss on the trade is $0.38 per share plus the $2 transaction fee, or $40. In percentage terms that’s 0.66% of the invested capital, so less than 1% of the capital is at risk.

And if the stock goes up more than 17% over the next 4 months, then I could make even more profit on this trade.

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