Transaction costs on option trades

External question — Quantitative Finance Stack Exchange Author: yong Original post: https://quant.stackexchange.com/questions/18133 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. It looks like the commissions alone for a non-index option trade is around 2-5%. For example, a BAC June ATM Call is currently trading at \$0.20; Interactive Brokers charges $0.7 per contract, which means that the commission alone is 3.5% of the value of the option! If one were to trade a more complicated strategy such as an Iron Condor to limit risk, the commission will go up even further. Yet BAC is the second most traded single-stock option! But why would anyone trade it? Similarly, SPX options have ~10x less commissions than SPY options per unit of risk, so why trade SPY options? I'm also puzzled by the lack of index options on things like gold. (Only a month ago did index options on non-US indices launch). Do investors primarily "buy-and-hold" options using strategies like call-writing? It seems that any sort of "clever" strategy that trades volatility as an asset class faces incredible transaction costs. Is it simply not done?

External answer — Quantitative Finance Stack Exchange Author: baerrus Original post: https://quant.stackexchange.com/a/18138 License: CC BY-SA 3.0 — https://creativecommons.org/licenses/by-sa/3.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Volatility is mostly an "institutional" trade. People who trade it have a seat on one of the exchanges so they do not pay broker commissions. On top OPRA still imposes its own fees, which can add up. In regards of why anyone would trade an asset when transaction costs are 3-5%. Ask millions of people who flip real estate - transaction costs are 5% and up. Yet real estate is the most popular trade in the world :)