Keeping Commisions Low

I've taken an excursion from my trading blog diary, but I want to keep it up because I like revisiting posts to see how my trading strategy has evolved over time, with the hindsight of how the market has done.

So, I didn't end up moving to Interactive Brokers and I've kept my ThinkOrSwim account. Although $1 option trades would be nice, $2.95 from ThinkOrSwim isn't too shabby. I think a lot of individual investors don't think about commissions when they put on a trade. I have a goal of keeping commission costs below 1% of my assets every year. This would keep my costs in line with the costs associated with a mutual fund or more managed ETF. If trading costs are much higher than this, the extra risk you have to take on to get a better return to make up for the cost difference will eat you up one day. At that point your money is better off in a mutual fund.

My ultimate goal is to keep commissions at 1% of profits per year (lower than 1% of assets every year you don't have a 100% gain). And how else to do that, but to aim for the commission only taking up 1% of your expected profit on every trade!

An added reason I like selling put options is that if the option expires worthless then closing out the position is commission-free. Hence, when I sold that AAPL Jan '10 165 put for $15.25. My max expected profit was $1,525. The $2.95 commission amounts to an expense of only 0.19% of my max expected profit.

A trade that I would do with lower commissions is selling E-Trade Jan '11 $2.5 puts for $1.2. Almost 100% return on risk, but the commissions eat up 2.45% of max expected profits. To me, the broker is getting too much of my potential return and I take on all the risk! Selling at the $5 strike for $3.50 might better.