Round Trip Transaction Costs
Categories: Trading
See: Alligator Spread.
You bought shares of whatever.com for $27, then sold them at the end of the day for $27, after watching them kiss $28 (with no tongue), only to slide back to $27 even at the end of the day. It was a round trip on the shares' price, from $27 to $28, and back.
So you broke even, right? No, not at all. You paid commission when you bought, and then commission when you sold, so you had something like a dime or so in transaction costs and actually netted $26.90 at the end, losing that dime for your troubles.
Related or Semi-related Video
Finance: What is Alligator Spread?28 Views
finance a la shmoop what is an alligator spread.... no it's not that
an alligator eats the spread from profitable trades to just a break-even [Alligator eats spread]
trade or worse the alligator is essentially the brokers commission or
spread however it gets paid which makes a given trade unprofitable like a trader
bought a stock for $118.23 cents a share thinking she'd sell it the next day for
$120 even and make a quick buck 77 but then the Commission comes in at a buck
80 making that particular trade unprofitable well in the real world that [Spread or gross gain from trade pie chart]
term applies to the options market place where Commission's or spreads can be
massive as a percentage of the entity being traded that is a bid-ask spread on
a volatile tech stock might be for a stock trading at 40 bucks a share today
for about ten weeks of duration a put on it at $35 might be priced as a massive
$2 a share meaning that in order to make money buying a put option the stock [Put option stock graph]
would have to decline by more than seven dollars in the next ten weeks that is if
an investor wanted to buy the put they'd be charged two bucks and if they wanted [Person takes away 2 bucks]
to sell the put all they could get for it would be like a dollar 20... 80 cent
spread there if you were trading on the puts and the calls got that then think
about the put itself well in order to make money buying a put option the stock
would have to decline by more than seven dollars in the next ten weeks so yeah it [Decline over more than 7 dollars shown on graph]
gets pretty brutal, careful for those options so let's say a few weeks go
along and the price of the put that they paid two dollars for now they want to
sell it because the stocks gone down in the right direction well at dollar 20
now all that gets a dollar eighty the spread ate them up like alligator ate em [Alligator lurking]
gobbled up all the profits so yeah when you combine multiple sets of options
like the above one you can imagine the alligator ends up being painted as well
very toothy [Man painting and crocodile appears scaring him away]