{"id":251,"date":"2019-02-04T17:19:20","date_gmt":"2019-02-05T01:19:20","guid":{"rendered":"https:\/\/quantcha.com\/news\/?p=251"},"modified":"2019-02-04T17:24:48","modified_gmt":"2019-02-05T01:24:48","slug":"the-hidden-and-not-so-hidden-impacts-of-commission-free-options-trading","status":"publish","type":"post","link":"https:\/\/quantcha.com\/news\/the-hidden-and-not-so-hidden-impacts-of-commission-free-options-trading\/","title":{"rendered":"The Hidden and Not-So-Hidden Impacts of Commission-Free Options Trading"},"content":{"rendered":"\n

A few months ago, we launched Quantcha Unlimited<\/a>\u2014an offer that bundled our options trading platform with commission-free trading\u2014for just $99\/month. The response we\u2019ve received since then has been pretty surprising.<\/p>\n\n\n\n

First, a lot of people have seen the offer and jumped on it immediately. This part actually wasn\u2019t surprising at all. They\u2019ve come from across the investor spectrum, from beginners to seasoned veterans. It doesn\u2019t take much experience to understand that you need high-quality tools to succeed in options trading. You also need extremely low transaction costs to make sure that you keep the lion\u2019s share of your profits. We offer both, and most people love it when they see it.<\/p>\n\n\n\n

But are we for real?<\/h2>\n\n\n\n

At the same time, we have also received our fair share of disbelief and skepticism. You can\u2019t blame investors for being cynical. There are so many empty promises and downright scams out there that it\u2019s become impossible to believe offers that seem to good to be true. Some companies charge 10x more than we do for their tools, so could we really deliver a compelling product at this price point? And how good could the trading experience really be if our flat fee was less than a few days of trading commissions on the major brokerages?<\/p>\n\n\n\n

We also don\u2019t have much brand recognition. We don\u2019t spend on\nadvertising, so most of our customers have come through direct outreach and\nword-of-mouth. But over the past five years we\u2019ve quietly evolved into a\ncompany that offers one of the industry\u2019s most comprehensive options platforms.\nOur features meet the demanding needs of investors, provide seamless brokerage\nintegration, and include commission-free trading. Across our trading platform,\ncustom APIs, and proprietary data feeds, our customers scale from legions of\nsuccessful retail and professional traders all the way up through several of\nthe world\u2019s largest hedge funds, market makers, and quant traders. But not\neveryone is sold on who we are and what we offer.<\/p>\n\n\n\n

Taking The Quantcha Challenge<\/h2>\n\n\n\n

To help address these concerns, we kicked off an initiative in January of this year called The Quantcha Challenge<\/a>. This endeavor is a reference to the famous marketing campaign Pepsi launched in 1975. At the time, Pepsi was nearly a century old, but they were somewhat of an upstart rival to the dominant Coke. They believed they had a superior product, but getting diehard Coke fans to even try it was difficult. So, they found the best way they could to get people to give them a shot\u2014and it worked. If you bought Pepsi stock back then, it would have returned you nearly 200:1 by now.<\/p>\n\n\n\n

I didn\u2019t think it would be appropriate to hang out in a\nsupermarket parking lot trying to get people to drink a brown liquid out of an\nunmarked Dixie cup, so we took a slightly different route to prove our point.<\/p>\n\n\n\n

We started The Quantcha Challenge<\/a> on January 9, 2019, with an empty $26K portfolio. We have since broadcast live on YouTube every market day showing how we use our own tools to build and manage a real-money portfolio. No cuts, no editing, no safety net. Along the way we also answer user questions, discuss option & market theory, and highlight our new and continuously expanding features.<\/p>\n\n\n\n

Goals of The Quantcha Challenge<\/h2>\n\n\n\n

While our primary goal is to help people see the platform in action, we also put some basic parameters in place for managing a successful portfolio. We want to be responsible with our investments, so we minimize our portfolio\u2019s volatility through position sizing and opportunistic hedging. We also use our tools to keep our overall positions in a beta-weighted-delta-neutral state. In other words, we want to build a portfolio that grows in value regardless of the movement of the overall market. We spend a great deal of time in the broadcasts explaining why we take on the trades we do, as well as how to understand how a given trade impacts the portfolio\u2019s exposure to the market at-large. Plus, our platform is designed to make things like this incredibly easy to understand and implement.<\/p>\n\n\n\n

\"\"
Analyzing How a Prospective Trade Impacts Underlying Book and Overall Portfolio Metrics<\/figcaption><\/figure>\n\n\n\n

In addition to minimizing the volatility of our performance,\nwe also set a somewhat conservative goal: gain 1% in our first month. This\nmight seem pretty modest, but we felt it was realistic to set the tone for our\nrisk tolerance (or aversion). It would also be a good way to illustrate how\nwell our tools would perform in finding profit without taking outsized risks.\nAnd if we could show how to consistently return that 1% every month, regardless\nof the market, it would be a great run.<\/p>\n\n\n\n

So, how did we do?<\/h2>\n\n\n\n

From a user education perspective, it was a smashing success. We were able to trade a wide variety of stocks using a wide variety of option strategies. <\/p>\n\n\n\n

\"\"<\/a>
The Quantcha Challenge Trade Distribution <\/figcaption><\/figure>\n\n\n\n

We showed off a considerable portion of our platform, and really punctuated how our underlying integration with Tradier delivers an extremely productive and seamless user experience.<\/p>\n\n\n\n

\"\"
The Quantcha Challenge Portfolio Allocation At One Point<\/figcaption><\/figure>\n\n\n\n

And the best part was that we showed everything live so you could understand exactly what to expect as a Quantcha Unlimited<\/a> customer. You get to see everything from trade idea genesis and optimization all the way through order fulfillment. This includes the quality and speed of the fills we get. This is a really important consideration for every investor, so please check it out in the videos and you won\u2019t be disappointed. (In the interest of full disclosure, we got some feedback that watching us shave bid\/ask spreads during order placement got boring, so we started managing them off the air.)<\/p>\n\n\n\n

Now let\u2019s talk about commissions<\/h2>\n\n\n\n

I mentioned earlier that we were surprised by some of the responses we received from some prospective customers when pitching our commission-free offer. Believe it or not, there are a lot of people out there who simply don\u2019t mind paying a ton in commissions. As someone who has had many months where my commissions were in the thousands of dollars, I can understand where they\u2019re coming from. But those days are long behind me now, and I hope they will be for you, too.<\/p>\n\n\n\n

Let\u2019s discuss the impact commission-free trading has on options investing. It is a monumental game-changer, especially when we have the tools to really take advantage of it. Let\u2019s start off by reviewing The Quantcha Challenge<\/a> portfolio returns since its launch a few weeks ago.<\/p>\n\n\n\n

The portfolio started with a cash balance of $26,024.77. Setting aside the $99 monthly fee for Quantcha Unlimited<\/a>, the closing value after 17 trading days was $26,884.22 for a 3.3% gross gain of $859.45. We filled well over 50 individual trades, but we\u2019ll use that number to be conservative. Those trades covered a total of 657 contracts, and we had one leg assigned and another exercised. As a side note, our efforts to maintain low volatility of returns was successful as our lowest point was only down -0.68%.<\/p>\n\n\n\n

The economics of commission-free trading<\/h2>\n\n\n\n

If we used a major brokerage that has a per-trade and\nper-contract commission structure, we\u2019d expect to give up a lot of this gross\nprofit. But exactly how much? Well, let\u2019s take a look at some representative\nstructures that may or may not line up with the latest published data from the\nsites of major brokerages.<\/p>\n\n\n\n

First, what about $6.95 per trade and $0.75 per contract\nwith a $19.99 exercise\/assignment fee?<\/p>\n\n\n\n
\n Per Trade\n <\/td>\n Per Contract\n <\/td>\n Assign\/Exercise\n <\/td>\n Monthly\n <\/td>\n Total Cost\n <\/td>\n Net\n <\/td>\n Return\n <\/td><\/tr>
\n $6.95\n <\/td>\n $0.75\n <\/td>\n $19.99\n <\/td>\n $0\n <\/td>\n $880.23\n <\/td>\n -$20.78\n <\/td>\n -0.08%\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

We would have paid more in commissions than we made. It\nmight seem unbelievable, but we\u2019d actually manage to turn a 3.3% gross profit\ninto a loss. It would be bad (for us, at least).<\/p>\n\n\n\n

Here\u2019s another example of a possibly theoretical broker with\na more competitive commission structure.<\/p>\n\n\n\n
\n Per Trade\n <\/td>\n Per Contract\n <\/td>Assign\/Exercise<\/td>\n Monthly\n <\/td>\n Total Cost\n <\/td>\n Net\n <\/td>\n Return\n <\/td><\/tr>
\n $4.95\n <\/td>\n $0.65\n <\/td>\n $4.95\n <\/td>\n $0\n <\/td>\n $684.45\n <\/td>\n $175\n <\/td>\n 0.67%\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

This is somewhat better, but that\u2019s not saying much. I guess\nat least we\u2019d get to keep around a quarter of the profits. It would still be a\nbummer to not reach our 1% goal.<\/p>\n\n\n\n

And now, Quantcha Unlimited<\/a>.<\/p>\n\n\n\n
\n Per Trade\n <\/td>Per Contract<\/td>Assign\/Exercise <\/td>Monthly<\/td>Total Cost<\/td>Net<\/td>Return<\/td><\/tr>
\n $0\n <\/td>\n $0\n <\/td>\n $9\n <\/td>\n $99\n <\/td>\n $117\n <\/td>\n $742.45\n <\/td>\n 2.85%\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

The numbers are clear. With Quantcha Unlimited<\/a>, you keep more of your profits. But commission-free trading is about so much more.<\/p>\n\n\n\n

Intangible benefits of commission-free options trading<\/h2>\n\n\n\n

One major benefit is the frequency we can hedge and day-trade options. We\u2019re not talking about \u201cget rich quick\u201d-style day-trading, but rather the kind of trades we place and decide to adjust once or more over the course of that same day. When we have to consider per-trade and per-contract commissions, it really disincentivizes us from updating positions to meet the goals we have for our portfolio. Even when the transaction costs may not be prohibitive, sometimes it\u2019s just a psychological pressure that we don\u2019t want to \u201cwaste\u201d a few dollars on what might already be a razor-thin trade margin.<\/p>\n\n\n\n

\"\"
Modeling a Minor Position Roll To Capture More Profit<\/figcaption><\/figure>\n\n\n\n

This also applies to partially filled orders. Sometimes we manage to nail the pricing so perfectly that we can only get part of our order filled. But then the opportunity changes and we\u2019re stuck with part of our order unfilled. With per-trade commissions, you\u2019ll typically need to pay a new trade commission if you cancel and replace the remainder of your order at a new price. Without per-trade commissions, it doesn\u2019t matter how many separate trades it takes to get your quantity filled.<\/p>\n\n\n\n

\"\"
Complex Order Trade Ticket<\/figcaption><\/figure>\n\n\n\n

Commission-free trading also expands the world of options we\ncan profit from. We don\u2019t need to worry about transaction costs eating heavily\ninto options trading in the pennies whether opening or closing. We can just\nplace the trade that\u2019s right for our portfolio.<\/p>\n\n\n\n

Another major impact of commission-free trading is that it reduces the costs of legging in to and out of positions. Sometimes we have to be creative about getting the best entry, and legging in or out of illiquid options or complex trades with fewer potential counterparties is the only way to get the best pricing. <\/p>\n\n\n\n

A real-world example<\/h2>\n\n\n\n

A good example of these benefits is an overnight Symantec earnings trade we placed for The Quantcha Challenge<\/a> portfolio. The options weren\u2019t particularly liquid, so we had to separate each leg of our calendar straddle into its own order. As part of this, we received some partial fills and had to replace those orders at different pricing to get the full positions we wanted.<\/p>\n\n\n\n

\"\"
Modeling a Calendar Straddle for Symantec Earnings on 1\/31<\/figcaption><\/figure>\n\n\n\n

The next day, we decided to roll one leg up to capture some short-term profit while closing the others out one by one. We were able to more than double our original $900 investment, which was great. However, with leg quantities of 69, 69, 40, and 40 contracts, we would have racked up nearly $300 in transaction fees with one of the major brokers. <\/p>\n\n\n\n

\"\"
Symantec Earnings Trade Tracking After Close on 2\/1<\/figcaption><\/figure>\n\n\n\n

If you want to learn more about this specific trade, you can check out the trade setup here<\/a> and discussion of closing it out here<\/a>. All episodes of The Quantcha Challenge<\/a> are available on YouTube, so you can follow it from the first day all the way through today.<\/p>\n\n\n\n

\"\"<\/a>
Kicking Off The Quantcha Challenge<\/figcaption><\/figure>\n\n\n\n

I hope you check out what we have to offer and consider how commission-free trading with our platform<\/a> fits in to your investing. And if you have any feedback, please let us know at hello@quantcha.com<\/a>.<\/p>\n\n\n\n

As always, good luck, and good hunting.<\/p>\n\n\n\n

Ed<\/p>\n","protected":false},"excerpt":{"rendered":"

A few months ago, we launched Quantcha Unlimited\u2014an offer that bundled our options trading platform with commission-free trading\u2014for just $99\/month. The response we\u2019ve received since then has been pretty surprising. First, a lot of people have seen the offer and jumped on it immediately. This part actually wasn\u2019t surprising at all. They\u2019ve come from across … Continue reading “The Hidden and Not-So-Hidden Impacts of Commission-Free Options Trading”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":259,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[2,5],"tags":[],"_links":{"self":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/251"}],"collection":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/comments?post=251"}],"version-history":[{"count":5,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/251\/revisions"}],"predecessor-version":[{"id":264,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/251\/revisions\/264"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/media\/259"}],"wp:attachment":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/media?parent=251"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/categories?post=251"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/tags?post=251"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}