Credit spreads trading is a popular strategy among options traders, known for its potential to generate consistent profits. However, while traders focus on analyzing market conditions, managing risk, and maximizing returns, one crucial aspect often overlooked is the impact of commissions on trading profits.

Commissions can eat into your gains and potentially jeopardize your credit spreads trading strategy. In this article, we will explore how commissions can affect your profits and discuss effective countermeasures to reduce their impact because this has been coming up in the Inner Circle Credit Spreads membership.

Understanding Commissions and Their Impact

Commissions are fees charged by brokers for executing trades on your behalf. They can vary based on the broker, trade size, and other factors. In credit spreads trading, where traders frequently open and close positions, commissions can significantly affect overall profitability. Let’s examine how commissions can erode your credit spreads trading profits:

1. Increased Transaction Costs: Credit spreads involve the simultaneous purchase and sale of options contracts. Each leg of the spread incurs a commission charge. As a result, multiple commissions are incurred for each trade, increasing the overall transaction costs. High commission fees can substantially reduce the net profit on a trade or turn a winning trade into a losing one.
2. Narrow Profit Margins: Credit spreads are designed to generate a small, consistent profit by capitalizing on the difference in premiums between the options contracts. Since the profit potential is limited, even a slight increase in commission costs can have a disproportionate impact on the overall profitability of the strategy.
3. Trade Frequency: Credit spreads traders often engage in frequent trading, as they aim to capture multiple opportunities and manage risk effectively. With each trade incurring commissions, the cumulative effect can eat into profits significantly. It is crucial to consider the impact of commissions over a series of trades rather than on individual trades alone.

How To Reduce The Impact of Commissions

While commissions can pose a threat to credit spreads trading profits, there are several strategies you can employ to reduce their impact:

1. Negotiate Lower Commission Rates: Brokerage firms often offer different commission structures, and negotiating lower rates can be advantageous for active traders. Engage in conversations with brokers to explore discounted commission structures or volume-based pricing that aligns with your trading style. One member from the Inner Circle Credit Spreads program negotiated their TD Ameritrade options commissions from .65 to .35.
2. Compare Commission Structures: Different brokers have varying commission rates and fee structures. Take the time to research and compare commission rates across multiple brokers. Look for brokers that offer competitive rates, particularly for options trading, to minimize your transaction costs. Click here to see a great comparison chart at the bottom of this page.
3. Consider Low-Cost Brokerages: Some brokerage firms specialize in offering low-cost trading services. These platforms provide a cost-effective alternative for credit spreads traders, as they typically charge lower commission fees, allowing you to retain a larger portion of your profits.
4. Optimize Trade Size: Review your trade size and aim for a balance between profitability and commission costs. Smaller trade sizes may result in lower commission expenses but could limit your profit potential. Conversely, larger trade sizes may lead to higher commissions but offer the potential for greater profits. Find the optimal trade size that suits your risk tolerance and minimizes commission impact.
5. Streamline Trade Execution: Efficient trade execution can help reduce commission costs. Utilize advanced trading platforms or automated systems that allow for seamless order placement and execution. This minimizes delays, reduces the chances of manual errors, and potentially lowers commission expenses.
6. Focus on High-Probability Trades: Emphasize the quality of your credit spreads trades over quantity. By carefully selecting trades with higher probabilities of success, you can increase your overall win rate and offset the impact of commission costs. A disciplined approach to trade selection is key to long-term profitability.

Conclusion And What I Did

I personally noticed that commissions were taking a large percentage of my profits even though long term, the strategies I use are still profitable when factoring in commissions. I would highly recommend you use a free platform like Robinhood or WeBull. However, if you are like me, trading a large account and wanting a better broker, I would advise you to look into TastyTrade. That is the platform that I moved over to and have been loving it ever since! To learn more about it click here, yes this is a referral link. To conclude, credit spreads trading can be a profitable strategy for options traders, but it’s important to recognize the potential threat that commissions.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer