I’m very picky about option brokers because many of my specific trading recommendations use puts and calls for leverage. Here’s the bad news about that: 99.99% of the brokers I’ve screened for the assignment flunk miserably, since they cannot execute your orders in a way that will leave you with even a prayer of making money. Ditto for such electronic access programs as RealTick and TradeStation. They appear to have been designed by computer geeks rather than traders, making it far more likely that you will lose money not only because of stupidity, but because of trading "accidents" that could have been avoided. Let me explain.

The key to trading options profitably is the use of "contingency orders." They differ from limit and market orders such as, "buy six October 40 XYZ calls for 1.30"; or, "buy four October 40 XYZ calls at-the-market." An example of a contingency order would be as follows: "Buy six October 40 XYZ calls for 1.30 as long as XYZ stock is trading 38.43 or higher." Such orders are designed to prevent one from having the calls dumped in one’s face if XYZ stock should plummet unexpectedly.

To follow the example further, the October 40 calls might be an excellent buy for 1.30 if the stock is trading 38.43 or higher, but would you want to buy them if XYZ were to break below that number and keep falling? Of course not. But if you don’t have a way to get your bid out of harm’s way when the stock hits an air pocket – that is, have a contingency on your order – then you are all but guaranteed to receive a lousy fill, and to be in a losing trade from the get-go.

Direct access trading platforms are even worse, as I mentioned above. In fact, they are actually dangerous to the financial health of the trader. Here is why. Most are enabled for "Advanced Order" capability, allowing you to set up an automated trade as follows: "Buy ten October 40 XYZ calls if XYZ stock is trading 38.43 or higher." Now, the intention of this wording should be clear to you in the light of what I’ve written above. However, the typical trading software interprets it very differently. In effect, it says to itself, "The stock is now at 39.50, so that part of the contingency has already been met; now, as soon as the second part is met – i.e., when the options trade for 1.30 -- I will buy them."

In other words, the computer isn’t smart enough to link these two conditions together; it considers each half as being fulfilled independently. The result, quite often, is that the stock will drop like a stone, and you’ll be buying your October 40 calls when XYZ is trading down around 37 and change, well below your downside target at 38.43.

I’ve explained all of this to product development guys at various trading software firms, and some of them clearly "get it". But the fact that they are unwilling to remedy the problem immediately – i.e., to make the order-execution feature think and act with a trader’s logic rather than a geek’s – implies that the trading-platform guys don’t really care whether their option customers make money. Why worry about it, they seem to be saying, when not one customer in forty would even know the difference?

As for discount and full-service brokers, most don’t even handle contingency orders, since they fear it would drive up their error costs. It’s fine with me if they don’t want to offer the service. But if their customers knew how important this ostensible "frill" was, they would run to take their business elsewhere.

Here is what one of my grads, Hunter Reynolds, had to say recently about the chat room: