If you're considering moving your options trading account, you may be looking at commissions as one deciding point. The lowest per-option price doesn't always translate in to the lowest commissions. That's especially true if you broaden your consideration of costs to include fees you might incur and costs due to your way of trading.

Some online brokerages offer low per-option commissions but charge a flat or minimum fee. Because options platforms change their fees from time to time, perhaps between the time this article appears and some subscribers read it, I won't use brokerage names in this article. They are, however, realistic examples at the time this article was written. Let's imagine that on July 2, a trader wants to buy a 5-lot of butterflies made up of the following options:

At-the-Money All-Put IWM Butterfly, OptionNetExplorer Graph:

I've set up my OptionNet Explorer to show two-way commissions for this trade, commissions to both enter and exit the position. At my current commission charge, that would be (20 contracts x 1.25/contract) x 2 = $50.00. The unrealized $50.00 loss shown on the chart reflects those two-way commissions. I pay no flat fee or minimum charge on my orders, so it doesn't matter whether I enter or exit the trade all at the same time or buy or sell the butterflies separately.

What if a broker instead charged the same $1.25/contract, as did one brokerage at the time this article was roughed out, but required a $12.95 minimum? Since each side of this order incurred $25.00 in commissions, the minimum would be exceeded at both entry and exit. The two-way commissions would be the same $50.00 as would be incurred with my current brokerage, right?

Not so fast. What if the order to buy the butterflies were completed as one order, incurring $25.00 in commissions, but you decided to lock in profits in those separate butterflies at staggered intervals? Perhaps you sold the first one when you had a 7-percent gain, for example, so your closing trade would have been as follows:

Order to Close One of the Previous Butterfly Contracts, Displayed on CBOE's Virtual Platform:

As could be determined from the quantities displayed, 4 options contracts will be involved in closing one butterfly. Commissions for this hypothetical brokerage for this order would be 4 x $1.25 = $5.00. Remember, however, that this broker charges at $12.95 minimum per order, so the actual commission for this order would be that minimum or $12.95. Imagine that this trader exited the 5-lot of butterflies in a sequence of 1, 2 and 2 lots. The total commissions for entry and exit would then be $25.00 (entry) + $12.95 + 12.95 + 12.95 = $63.85. That's considerably more than the $50.00 paid for entry and exit on the prior platform. However, if a trader trades big, in 50-lot trades, exiting in lots of 10, 20, and 20, the commissions on both platforms would be the same since the minimum fee is exceeded in each order and the same $1.25/option is incurred for each trade.

A third online brokerage currently charges $8.95 + 0.75/contract. Entry would be $8.95 + (0.75/contract) x 20 option contracts = $23.95. Entry would be cheaper than with either of the previous two brokerages. What if a trader were to exit the 5 butterflies in the same sequence of 1, 2 and 2 lots? The exit would cost $8.95 + 4($0.75) + $8.95 + 8($0.75) + $8.95 + 8($0.75) = 3($8.95) + 20($0.75) = $26.85 + $15.00 = $41.85. Altogether, the entry and exit would have required $23.95 + $41.85 = $65.80, making this the most expensive of the three. If the trader traded differently, this conclusion might not be true.

What about a broker that charges just $0.70/contract with no flat fee, only a $10.00 minimum per month in commissions? That's an easy one, isn't it?

Maybe not. My brokerage absorbs many exchange fees, and those fees can be significant for some underlyings. Does that brokerage with the $0.70/contract commission pass on more of the exchange fees for each transaction to the trader? Does it charge a trade cancellation fee, as the brokerage charging just $0.70/contract did at one time? Fills are usually fairly easy on the highly liquid IWM. However, what if you're trading the SPX with its wider spreads and you just can't get fills where you want them, so you cancel often and try another tactic?

What's the point? Go beyond looking at a commission structure. Think about the way you trade. I like to keep my PnL line relatively flat, so that means that I'm often buying or selling a vertical. One reason I changed from a brokerage that I had liked was because I was incurring huge commission costs because of their minimum or flat fee. If you put on a sizeable trade and rarely adjust, just taking it off when it's hit either target or max loss, you might be more worried about the per-contract cost than the flat fee because you'll rarely incur that flat-fee cost.

Go beyond looking at the commission structure and think about other fees and commissions. If you trade in such a way that any exchange fees would be minimal and you almost never cancel an order, such fees may not matter much to you. If you do often pull or adjust orders, however, you may find that those cheap commissions don't tell the whole story.

If you're comparing brokerages, do some math.

Linda Piazza