Transaction Costs (Options) Definition

Definition

The word trade cost identifies the charges related to the implementation of a trade and the maintenance of some posture. Transaction costs include brokerage commissions, exchange fees, in addition to fees imposed by the Securities and Exchange Commission.

Explanation

Before placing an order to purchase or sell an option, an investor needs to know the trade costs related to setting and keeping the positioning. Along with the premiums received or paid when buying or writing a different option, trade costs impact the sustainability of their invest or ‘s trade. Cases of trade prices include:

  • Commissions paid to brokerage firms, on average paid on a percent option basis. These fees cover that firm’s services, like executing this purchase.
  • Exchange prices, that compensate markets like the Chicago Board of Trade for managing a solid and dependable market place.
  • Regulatory prices, such as the ones charged by the Securities and Exchange Commission.
  • Margin interest, that applies when an investor wants to work with leverage to finish a trade. Margin interest is that the fee charged for borrowing money from the brokerage business.

When calculating a break even point, the buyer should consider these factors: the strike price on the option, the premium paid if stepping the agreement, and also the trade costs collected by their own brokerage firm.