Evaluating option strategies is effect of transaction costs

Reference no: EM131291052

(Concept Problem) Another consideration in evaluating option strategies is the effect of transaction costs. Suppose that purchases and sales of an option incur a brokerage commission of 1 percent of the option's value. Purchases and sales of a share of stock incur a brokerage commission of 0.5 percent of the stock's value. If the option is exercised, there is a transaction cost on the purchase or sale of the stock. Determine the profit equations for the following strategies, assuming that the options are held to expiration and exercised if in-the-money rather than sold back. Assume that one option and/or share is used and that any shares left in the portfolio are sold.

a. Long call

b. Long put

c. Covered call

d. Protective put

Reference no: EM131291052

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