Hello - Are there any online brokers that offer both stock and furues options?

I've been looking around at most of the popular sites (eTrade, OptionsXpress, etc.) and it appears they just deal mainly in stock options. There are other sites that appear to only deal in futures options.

Are there sites they deal in both? Am I missing something or not looking hard enough?

DWG

Yes, there are online brokers who offer both stock and futures options. One of the them is Interactive Brokers. They have a good reputation and they charge really low commissions.

Larry

Thanks, Larry. I'll check the site out.

DWG

Larry,

I checked out Interactive Brokers, as you recommended to DWG. However, I am also looking at a few other brokers, one of which is ScotTrade. They offer options trading, but when I dig deeper, they do not permit uncovered calls, spreads and straddles. Uncovered calls I can understand, but any idea why some brokers wouldn't allow straddles?

Also, do you have any other online brokers that are options-trading friendly that you would recommend?

Thanks,
Brian

Brian,

I don't know what the problem is with Scottrade. I wouldn't go with any broker who wouldn't let me do anything that's allowed by the exchanges and the SEC - including writing naked options. They're pretty much telling you that, "Yeah we allow options, sort of. But we don't really want to do them." If they don't allow straddles it can only be because they don't even know what they are. That's one thing I like about straddles. Nothing really unexpected can happen with them. So they are appropriate for newbies and pros alike.

Choosing a broker, like most things, depends on what you're looking for. For the great majority of my business, I use Brown & Company . They have me on what they call their "Elite" status which means that I get a lot of extra goodies, service, and a special number to call that puts me through to a team of brokers who are specifically assigned to accounts like mine.

But if I were just getting started it would largely depend on what markets I was interested in. If I wanted to be in a positions to trade everything - stocks, options, futures, everything - and if I didn't want to have more than one broker, I would probably go with Interactive Brokers.

If I knew that I wanted to specialize in options with maybe just an occasional stock trade, I would probably either go with OptionsXpress or thinkorswim. They are both options specialists with a very good reputation and they are both run by option pros.

Keep in mind that I haven't done business with any of the brokers that I've mentioned accept for Brown. I'm just suggesting them based on what I've heard and what I've read. Maybe someone who has used other brokers and are pleased with them (or not pleased for that matter) will chime in on this.

Larry

One more thing that might help you choose a broker for options - Optionetics does a pretty good job of reviewing the various brokers from an options perspective.

Larry

Thanks for the names and advice.

Brian

Hi, Larry

I have not sell short{stocks] using online brokers
before. How do I go about doing it? Is is difficult
doing it for a newcomer like me? This may seem a very
basic question, but I hope you can help.

Leon

Hi Leon,

I'm not sure if you're asking how to sell short in general or specifically how to sell short through an online broker. So let me go through the mechanics of how to sell short and just know it would work the same whether your dealing with an online broker or any broker. This is going to be long, so bear with me.

Selling short is not very complicated but it is a tough concept for many investors to grasp because you’re doing something that goes against human nature. When you sell short you’re selling something that you don’t own. That’s why it can be a tough concept to comprehend. After all, how can you sell something that you don’t own? It just doesn’t make sense.

Think of selling short as the opposite of buying long. So instead of placing an order to buy you simply place an order to sell short so many shares of XYZ stock. And since you are selling something that you don’t own, your broker (online or otherwise) arranges for the stock to be borrowed, so that the shares can be delivered to the buyer who, of course, is entitled to receive the shares. The borrowed stock comes mainly from shares held by the brokerage firm for margin accounts. In fact, in order to sell short you must have a margin account. And the shares are left with the firm as collateral for the loan.

The stock remains borrowed until such time as the transaction is completed by purchasing the equivalent number of shares. That may be a couple of days later or it may be years later. It doesn’t matter because as far as the IRS is concerned all short sale transactions are treated as short-term gains or losses.

This is all much more simple than it may seem because all of this borrowing of the shares stuff is invisible to you as the short seller. Your broker handles all of that. The only time you’ll be aware of what the broker is doing is if you try to sell short shares of a stock that the broker has trouble borrowing. Your broker will simply tell you that they can’t borrow the shares. But as long as you stay with actively traded stocks, that’s usually not a problem.

Now there is a really stupid, archaic rule involving short sales of stock that you need to be aware of. When you place an order to sell a stock short, your broker, adhering to the rules, must execute the order on an “uptick,” which is a price higher than the last different price.

When I say old and archaic, let me tell you why there is an uptick rule. Since the coming of the SEC and reform legislation after the 1929 crash, a stock cannot be forced down directly by orders to sell it short. Everyone – specialists, professional traders, and you and I alike – must sell short only on a rising price. Someone else has to take the initiative to purchase the stock “up.” Very rarely will there be a bid already there already entered at a higher price than the previous sale price. So usually the sale is made by a buyer’s stepping forward to take your offer. This can be frustrating because the result is that the stock is likely to go up, however briefly, against your short sale. It’s just something we have to live with because way back when, the feds though that short selling had something to do with the 1929 crash – it didn’t. Hopefully, since the SEC is busy reforming again right now, they’ll finally get around to getting rid of the uptick rule. But I’m not holding my breath.

Okay, let’s follow an example to see how short selling might work in the real world. Suppose you think XYZ stock is likely to go down. So you enter an order to “sell short” 100 shares of XYZ at, say, 70, which is the last price. And let’s say that it is up from the previous transaction of 69.80. Therefore, an execution price at 70 would be what they call a “zero-plus tick.” It’s higher than the last previous different price. So a short sale could happen at that price. Therefore, the stock is offered for sale at 70. However, if the stock were to trade at 69.80 again instead of 70, your order would have to wait until there is a buyer at 70 because that was where you placed your limit. If you had placed a market order instead of a limit order then the specialist would have to wait for an uptick in order to execute your trade. So if the stock just keeps trading down you could end up getting it sold at a much lower price that you had anticipated. Do you see what I mean about frustrating? I don’t mean to overemphasis the uptick rule, because it’s usually not that big of a problem. But you just need to be aware of it.

But let’s say that you were successful in getting the short sale done at 70. The buyer must pay $7,000 to your brokerage firm, for which he is entitled to have the shares deposited in his account. So your broker borrows the shares and fulfills your obligation on your behalf. Your broker also gets money from you, at least enough to meet your margin requirements in order to secure the trade from your side.

And then when you decide to close out your short position, you simply buy the stock as you would any purchase, except that the order would be designated “buy to cover short.” The shares received by the purchase are used to replace the previously borrowed shares in a bookkeeping transaction. Since you shorted the stock at 70, if you were able to cover your short at, say, 65, you made money. If , on the other hand, you covered your short at, say, 75, you lost money.

Believe me, Leon, it’s much simpler than it sounds. Most of the gory details that I described happens without you even being aware of it. But I know that very few people have any idea of what goes on with a short sale so I thought I would take some time to explain it. One of the big mysteries of life to me is that 98% of investors never sell short. Why someone wouldn’t want to make money on both sides of the market is something that I’ll never understand. Maybe I should have taken more psychology courses in school and fewer business course, I don’t know. But those few who are willing to participate in both sides of the market by selling short when stocks are going down have a huge advantage over the typical investor.

Larry

Thanks for replying to a very basic question. I really appreciated it.

Do you need a special account to sell short? Does the broker charge extra fees for borrowing shares, Larry/

In the scenario of selling short, when do you actually
receive the proceeds from the short sale?

Leon

Leon,

You need to have a margin account to sell short. You don't have to use the available margin. You can reduce your risk by put up 100% instead of the 50% that you are allowed. But all short sales must be done in a margin account.

There are no extra fees for borrowing shares.

I'm not sure what you mean by "when do you actually receive the proceeds from the short sale?" As I said in my example your broker is going to get enough money from you to at least meet the margin requirements. So the brokerage firm has extra money, yours plus the buyer's from this trade and, therefore, should not charge you interest in your margin account. You make your money when you buy back the stock by covering your short position. In my example, if you shorted 100 shares at 70 and you cover your short at 65 you made a $500 profit. So your account is credited by the amount of $500.

Is that clear as mud? . If you're still confused help me out with the part that you don't understand and I'll try to clear it up for you.

Larry

Okay I get how a short sale works. What would happen if I were to short a stock like World Com that goes in the tank and has trading suspended? Seems like I'd be in a profitable position but how would I cover my short sale?

Donnie,

If trading has been suspended then there is nothing that you can do until trading resumes. But, yes, WorldCom would have been a great short.

By the way, most brokers won't let you short a stock under $5. Most people think that it's an SEC rule. It's not. If you can borrow the stock, you can short it. I know a guy that makes a lot of money primarily by shorting dog stocks under $5. You really have to know your stuff, but it can be done.

Larry