Prologue

I watched the Matrix movie last night. When Morpheus asks Neo the question above, Neo answered “the Matrix” – I simultaneously answered “Options Brokers Trading Fees.”

One area of angst that I have that is contributing to my poor P&L performance is the amount of fees I have to pay to play. Ameritrade is a fantastic broker for me as I am learning the Options ropes. But they are also one of the highest-priced brokers on the market.

One of my Options trading strategies for this year and next is to keep my dollars at risk at a minimum and focus primarily on maximizing my Return on Capital (ROC). But the side effect of this strategy is that I have to send a high percentage of my potential profits to Ameritrade as fees.

To illustrate my handicap, my Ameritrade Options related fees (as negotiated with Ameritrade) are:

• Options Base Fee = $4.95
• Options per contract Fee = $.50
• Exercise Fee = $19.99
• Assignment Fee = $19.99
• PFOF (Options) = $0.49 average per contract (SEC Rule 606 Report /2Q 2019)
• Margin Interest rate = 10.5%
  (See the Epilogue below for more info on Ameritrade’s fees.)

With the above fees in mind, let’s take a look at a couple of my positions:

SPY: 282p/278p – 1 Contract – Open 9/5 – Expires 10/4 – Credit = $31.05
(Vertical Bull Put Credit Spread)

This trade sold for a premium of $0.37/share = $37.00 credit.
Total fees paid to Ameritrade = $4.95 base fee + 2 legs for $0.50 each = $5.95.
Net premiums collected (after fees were paid) = $37.00 – $5.95 = $31.05.
So right off the bat, I lost 16% due to trading fees.

QQQ: 192.5c/192c – 2 Contract – Open 9/11 – Expires 10/4 – Debit= $64.95
(Vertical Bull Call Debit Spread)
Max Risk = $64.95, Max Gain = $35.05

Purchasing two contracts at $0.29/share = $58.00 debit.
Total fees paid to Ameritrade = $4.95 base fee + 4 legs for $0.50 each = $6.95.
Total cost with fees = $58.00 + $6.95 = $64.95 debit.

But!!! For this trade to be a success, both sides of this position need to be ITM before expiration. So I have to buy-to-close this position ideally for $.50 a share.

Closing at $0.50/share = $.50 * 100 shares * 2 contracts = $100.00 credit.
Total fees paid to Ameritrade = $4.95 base fee + 4 legs at $0.50 each = $6.95.
Credit after closing = $93.05
Net profit from trade = $93.05 to close – $64.95 to open = $28.10

If we were to add back the fees I paid to Ameritrade for the privilege of using their system, then the net profit would be $28.10 + $6.95 to open the trade + $6.95 required to close a successful trade = $42.00.

So, the total fees paid to Ameritrade were $6.95 + $6.95 = $13.90. This money represents a whopping third (33%) of my gross income going to Ameritrade!

Thus, the immediate $16% loss for Put Credit Spreads or 33% loss for a Call Debit Spread tells me that the real winner in my Options Trading education is Ameritrade.

Reviewing my logs to examine how fees have affected my performance for this year, I see this:

• Number of Spreads execute for 2019 = 61
• Total potential profit from the 61 spreads = $3,427.
• Total fees paid to date = $652.90
• The average loss due to fees = 19%

Even though I made some bonehead trade decisions early on, I currently have a net loss for my 9-month effort of -$987. And $652.90 of that net loss were all fees to Ameritrade.

I also learned that low-risk Vertical Pull Call Debit Spreads are severely handicapped by the double fees required. So no more Vertical Pull Call Debit Spreads until I can fix my fees fumbles!

My immediate task now is to look at other Options Brokers who will charge less fees.

P&L and Performance Status

YTD (2019)

Realized Net Profit from Spreads: -$987.20
Spreads started: 61
Realized ROC (target = 72% for the year): -25%

A little caveat to the dismal P&L shown above. Earlier this year, I made a lot of rookie mistakes, and I’m still paying the price. It’s going to take a couple of months to recoup, and I do feel I have improved my trading understanding to fair better.

Last Month (Aug)

Realized Profit: $113.75
Spreads Started: 10 (all Spreads closed)
Realized ROC (target = 6.0%): 5%

Spread Trades Won: 7
Spread Trades Lost: 3
Win Ratio: 70%

MTD (Sept)

Realized Profit: $102.00
Spreads Started: 7 (6 still open)
Current at risk $$$ for Spreads (Max: $3,960): 1,350.90 (34% of max risk)
Realized ROC (target = 6.0%): 52%

Spread Trades Won: 1
Spread Trades Lost: 0
Win/Loss Ratio: 100%

Schedule for this Week

Monday:

• Review and tweak the Trend-Channels for the general market direction. Determine if the IV is high or low so I can better choose Debit or Credit spreads.
• Review and tweak Trend-Channels for all stocks in the watch list.
• Confirm that the target expiration date for all options trades is set to Oct 11 (25 days).
• By 10 AM, stage possible trades for all watch list stocks (but don’t trade anything).
• Watch 1 Webcast or take one online mini-course to be completed by Friday.  

Tuesday:

• Review how yesterday’s staged trades moved. Adjust premiums to take advantage of movement (these are “long-shots”). 
• Submit a couple of Spreads, but keep a close watch. If one takes, cancel the others (we just want one new active trade). 

Wednesday:

• If no “long-shot” spreads were accepted yesterday, then readjust premiums closer to ATM prices and resubmit. We want only 1 spread accepted so keep watch.
• Recheck/tweak trend-channels. 

Thursday:

• Reset target expiration date to Oct 18 (29 days out to the following Friday). 
• By 10 AM, stage possible trades for all watch list stocks. 
• Submit a couple of Spreads, but keep a close watch. If one takes, cancel all others. (Do not submit a trade with for the same ETF as Tuesday.)

Friday:

• Same as Wednesday.
• Update trading journal (this blog) and update it to the Internet by end of the day.
• Make sure you watched a webcast.

Trades Ended This Week

No trades were set to expire this week.

Trades Still Cooking

SPY: 282p/278p – 1 Contract – Open 9/5 – Expires 10/4 – Credit = $31.05
(Vertical Bull Put Credit Spread)
Open: Prob. OTM = 82.2%, ROC = 8.6%, Max Risk = $363
Now: Probability OTM = 92.8%

QQQ: 179p/175p – 1 Contract – Open 9/5 – Expires 10/4 – Credit = $31.05
(Vertical Bull Put Credit Spread)
Open: Prob. OTM = 82.8%, ROC = 8.6%, Max Risk = $363
Now: Probability OTM = 92.3%

QQQ: 192.5c/192c – 2 Contract – Open 9/11 – Expires 10/4 – Debit= $64.95
(Vertical Bull Call Debit Spread)
Open: Prob. ITM = 52.3%, ROC = 54.0%, Max Risk = $64.95, Max Gain = $35.05
Now Probability ITM = 41.7%

SPY: 302c/301c – 1 Contract – Open 9/18 – Expires 10/11 – Debit= $54.00
(Vertical Bull Call Debit Spread)
Open: Prob. ITM = 48.9%, ROC = 56.9%, Max Risk = $59.95, Max Gain = $34.10
Now Probability ITM = 56.6%

DIA: 274c/273c – 1 Contract – Open 9/19 – Expires 10/18 – Debit= $50.00
(Vertical Bull Call Debit Spread)
Open: Prob. ITM = 41.2%, ROC = 68.1%, Max Risk = $55.95, Max Gain = $38.1
Now Probability ITM = 32.1%

New Trades for This Week

DIA: 252.5p/247.5p – 1 Contract – Open 9/25 – Expires 11/01 – Credit = $44.05
(Vertical Bull Put Credit Spread)
Open: Prob. OTM = 83.6%, ROC = 9.9%, Max Risk = $444.05, Max Gain = $50.00
Now Probability OTM = 82,5%

Since I’ve learned to avoid the double-fee whammy of Debit Spreads, I’m focusing primarily on credits.

For this DIA ETF position, my long-term trend channel is still moving up. This is supported by the 9-day being above the 50-day SMA. Additionally, the short-strike I selected is more than one Standard Deviation below what I calculated from the IV formula shown below:

Current DIA ETF price = $268.17.
Current DIA ETF IV = 16.7%.
Number of days to expiration = 36.

One Standard Deviation movement = 268.17 * .167 * SQRT(36 / 365) = $14.06
Estimated short strike = $268.17 – $14.06 = $253.63.
My 252.50 short strike price is below that.

Epilogue

Beyond the Options trading fees I pay, Federal law permits broker-dealers like Ameritrade to route their orders to market centers in exchange for compensation. This routing is called Payment For Order Flow (PFOF), and Ameritrade receives a percentage of this payment as a rebate for processing my Options orders. This payment is the money I lose via the Bid/Ask spread. Ameritrade, for their brokerage service, gets an average of $0.49 per contract from PFOF. This revenue is NOT passed to us as cheaper trades but as superior customer service.

To Ameritrade’s credit, a significant percentage of this additional PFOF revenue is passed back to us in the form of cost-free services (funds research, education, Think or Swim, etc.) Other discount brokers will give varying percentages back to their customers in the form of narrower Bid/Ask spreads which generate faster trades.

Political Note: When Elizabeth Warren talks about taxing Wall Street, this is where she is considering plugging in the IRS. I assume that Ameritrade and other brokers will just past this new tax along to us as a broader Bid/Ask spread. (I guess that makes me Wall Street – Yeah!)

Cheers…