The term transaction cost refers to the charges associated with the execution of a trade and the maintenance of a position. Transaction costs include brokerage commissions, exchange fees, as well as fees levied by the Securities and Exchange Commission.
Before placing an order to buy or sell an option, an investor must understand the transaction costs associated with establishing and maintaining the position. In addition to the premiums paid or received when buying or writing an option, transaction costs affect the profitability of the investor's trade. Examples of transaction costs include:
When calculating a breakeven point, the investor needs to consider the following variables: the strike price on the option, the premium paid when entering into the agreement, and the transaction costs collected by their brokerage firm.