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