Thursday, December 27, 2007

Good Luck Getting a Mortgage Here…

I don't talk much about my trading and investing background, but suffice it to say that I have been an active investor for 25 years, have traded all sorts of options for 10 years, have accounts with about a dozen financial institutions, some of which carry what I consider to be significant balances, etc. On top of that, the options commissions alone that I generate are quite substantial.

So...just for the heck of it, I decided to open an account with Bank of America and see how well their 30 free trades a month promotion works and whether it makes sense to move a large chunk of money there and make them a part of the network of institutions with which I place most of my trades.

On their options application BofA asks the usual questions about the number of years trading options, number of trades per year, average trade size, types of trades, etc. Given the substantial history and volume I have in this area, including writing naked options on equities and indices, I was surprised that it had taken several weeks for them to add options authority to an account that I opened and funded at the beginning of the month. Finally, I get a call from them today. I returned the call and their rep proudly informed me that I have been approved for Level 3 options trading – which is their equivalent of an investor with training wheels: no authority to write uncovered puts and calls for equities, not to mention index options. I just laughed. I love thinkorswim and optionsXpress. I also think TradeKing does an excellent job with options, especially considering their pricing. No doubt those three brokers will continue to get 95+% of my options business. Fortunately, I won't have to worry about how good the options executions are at Bank of America. What a joke...

[For those who are wondering, I did not reference the blog, nor ask the person on the other end how he would go about evaluating a fair price for a VIX calendar spread when the VIX is in contango.]

Disclaimer: I have no position in BAC at the moment, but keep in mind that this is the same company that invested $2 billion in Countrywide Financial when the common stock of CFC was trading at about 26 (it is now at 9)

13 comments:

dr_sean said...

yeh, i go thru thinkorswim. great people, great platform. Not a big surprise there...BAC

andrew said...

Hi Bill,

From your experience, what broker (among thinkorswim, optionsXpress, and TradeKing) that you'd consider best suited for someone who has been trading stocks for many years, but has limited experience with options (less than a year)?

I have accounts with Fidelity, but since I have limited options trading experience, they only allow covered call writing, and not even simple calls/puts. I'm thinking about thinkorswim since I've heard many good things about them. Do you know if they have any restrictions for options trading, in terms of experience, account types (IRA/individual), or types of options?

Thank you very much for your advices.

Andrew

Bill Luby said...

Hi Andrew,

I'd say that optionsXpress and thinkorswim are both excellent for beginners. TradeKing does a good job, but their educational resources, tools and functionality is more of the bare bones variety.

Personally, I think optionsXpress is a slightly better choice for the beginner, but that may be a function of my comparing the optionsXpress web experience with the tos desktop platform. From an educational standpoint, optionsXpress has a broad range of webinars on everything from the basic "how do I..." to complex options strategies. tos, on the other hand, is owned by Investools, which started in the investor education business and bought tos in September 2007. The bottom line is that they both excel in the area of options education.

As for options level, I suspect that both firms would probably let you buy calls and puts right off the bat. Certainly ask for that. In my opinion, the fun (and complexity) really starts when you get to spreads. That is where you cross a major threshold, even though your risk is limited.

Each firm is different in how they determine your options level, but they rely largely on experience, income, net worth, desired risk, etc. to decide which options levels that they assign. Don't be shy about asking for an upgrade to the next level...and just because you have a certain options authority, you don't have to make those kinds of trades.

As far as IRAs go, I don't have an IRA with any of these three brokers, but optionsXpress appears to allow all options trades except naked puts and calls (see their IRA FAQ for more info.) tos has a similar policy and puts it this way: "you can trade any complex option strategy you like as long as the resulting position has defined risk. We do not allow for short stock, naked short calls or futures."

In the end, it probably makes sense to start with either optionsXpress or tos, then try the other once you know your way around and know what you like and don't like with your first choice.

I'm sure you know that you may be taking on considerably more risk with options trades, so this is a good time to immerse yourself in the subject with something like Larry McMillan's Options As A Stretegic Investment.

Good luck and good trading!

-Bill

andrew said...

Bill,

Again, thank you very much for your detailed information and advices. I do have the Larry McMillan book, and yes, I'm aware that options trading is more risky. That's why I'm a frequent reader of "VIX and More". :-)

Andrew

Bill Luby said...

Just a quick factual correction: Investools bought thinkorswim in September 2006, not 2007 as I typed above.

ryans dad said...

Bill,

Any broker that wouldn't approve you for naked writing should be taken out and,,,, well we will leave that part out. Totally ridiculous! I am going to fight my company tooth and nail to keep my account at IB when I get my series 6 . Same thing like bofa total trash and high commisions for employees.

masteroftheuniverse said...

I wonder what kind of fills you'd get with BofA and how late their quotes are. Those 30 free trade deals usually cost you more in the end.



Jeff

dowoper8tr said...

Bill, try again with BAC. Your account could single handedly allow them to provide Hand Soap for their restrooms. I thought of your blog as soon as CNBC reported BAC's new BYOHS policy. Next up, 1 square per bathroom session. No squares to spare here.

JD said...

Hello Bill,

I chanced upon your blog while searching for "Implied Volatility" and its affect on calls and puts. I have started investing only recently and am trying to learn as much as I can. Recently, I got interested in options. Currently, all I am doing is just learning about options. I don't think I have enough knowledge about the subject matter or enough experience to start trading on options. Other than Larry McMillan's book, do you have recommendations for any other books for an individual starting on options? Basically, would you be able to suggest how best to approach learning this complex subject. The more I read, the more confusing and complex does the subject look. And although there are books that talk all about options, I haven't found any that tells a newbie about the tricks of the trade. For example while learning about LEAPS, I came upon a discussion thread on Google where a person was talking about buying LEAP calls of Citi. Then, somebody responded saying that you should be careful with '09's and '10's LEAPS as Implied Volatility is pretty high. Now that got me looking for more information on Implied Volatility. I have found a couple of articles that briefly touched on implied volatility and its impact on option's price, but not much. But, maybe, that just because I am searching on the wrong keyword or looking for the wrong stuffs. Any advice and guidance you can provide will be greatly appreciated.

Thank you
JD

Bill Luby said...

Good stuff, dowoper8tr.

For those who missed it, the list of items BAC is supposedly no longer providing to rank and file employees includes:
- Soups
- Crackers
- Flavored Teas
- Sugar-Free Hot Chocolate
- Hand Soap

Thanks to UrbanDigs.com for providing the details.

Bill Luby said...

Hi JD,

Frankly, I'm going to stick by "Options as a Strategic Investment" as my #1 book recommendation. If you go through that one slowly -- and reread and refer to the sections that interest you the most -- you will go quickly up the learning curve.

That being said, there are a lot of excellent online resources, much of it free.

Two great resources in particular are:

1) The Options Industry Council

2) TheOptionsGuide.com

There are also a number of excellent blogs devoted to those who are new to options trading. Three that immediately come to mind, off of the top of my head, are:

1) Options University

2) New Option Trader

3) Options Trading Beginner

I'll see what I can do about posting a good set of options links soon.

Good luck!

-Bill

JD said...

Bill,

Thank you for your prompt response!! I appreciate it very much. I shall be visiting your blog regularly to learn more about investing. Thank you for helping out a newbie.

JD

New Option Trader said...

Hi Bill,

Thanks for your comment on my blog (about a similar experience with Fidelity) and the nice mention above.

This post is so funny, it really is like my experience with Fidelity. I do believe that despite being in the investing industry, the bigger institutions just don't have a background in options so aren't able to evaluate option traders the way TOS, OptionsXpress and TradeKing can. Guess this is stating the obvious at this point but it still amazes me.

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