The cost you can’t see

If you ask someone what trading costs them, they will tell you about commission. It is the only cost that arrives with a label on it, so it is the only one that gets counted.

On most brokers commission is now somewhere between free and about $0.65 a contract. It is, by a wide margin, the smallest thing you pay.

Today is the arithmetic of everything else. Not a difficult calculation. Just one nobody does, because none of the numbers show up on a statement with a name attached, and a cost with no line item is a cost that feels like it did not happen.

The four costs

1. The spread. You buy near the ask, you sell near the bid, and the gap goes to whoever was making the market. Charged whether the trade wins or loses.

2. Slippage. The spread you saw and the price you got are different things, and the difference is worst exactly when you are in a hurry, which is exactly when you tend to be.

3. Fees. Commission, plus per-contract exchange and regulatory fees, plus assignment and exercise fees where your broker still charges them.

4. Assignment. Almost never modelled and the sneakiest of the four, because the cost is not the fee. It is what you have to do afterwards.

Run the numbers on a real-ish account

Take an account of $25,000. The trader does about four round trips a week, 200 a year, which is unremarkable. Two contracts at a time, average option price around $2.00, so $200 of premium per contract and $400 per position.

They are not reckless. They just have not thought about any of this.

Spread. The contracts they gravitate to are the interesting ones, slightly out of the money, near-dated, and those carry a spread of roughly 10% of mid. On a $2.00 mid that is about $0.20, which is $20 per contract for a round trip if you take the offer going in and hit the bid coming out. Two contracts, $40 a trade.

200 trades at $40 is $8,000.

Read that again before moving on. Eight thousand dollars, on a twenty-five thousand dollar account, in a cost category most people have never once added up.

Commission. $0.65 per contract, four contract-sides per round trip, $2.60 a trade. 200 trades, $520.

Slippage. Not every fill lands where the screen said. Fast tape, thin book, an exit taken in a hurry. Call it an extra $2 per contract per round trip, which is conservative. $800.

Assignment. Say eight positions a year end up assigned or exercised, some at expiry, some early. The fee might be $15 a time, so $120. But then you are holding 100 shares per contract you did not intend to hold, and you have to unwind them. Stock spread, another commission, an overnight gap you never agreed to. Call the round trip on the unwanted stock $50 each. $520 all in.

Exchange and regulatory fees. Pennies per contract, 800 contract-sides. $50.

The total

$8,000 plus $520 plus $800 plus $520 plus $50 is $9,890.

That is 39.6% of the account, per year, paid before any question of whether the trader is good at this.

Which means to finish the year up 10%, they need to gross just under 50%. Not beat the market by 10%. Gross fifty per cent, consistently, to net a decent but unremarkable ten.

I do not know what your edge is. I know it is very unlikely to be fifty points a year.

The same trader, two decisions later

Now change exactly two things. Not the strategy. Not the analysis. Not the skill.

Decision one. Only trade contracts where the spread is under 4% of mid. On a $2.00 contract that is $0.08, so $8 per contract per round trip instead of $20. And because those contracts are liquid, a limit order resting between the bid and the ask actually gets filled, so on average you give up about half of that rather than all of it. Call it $4 per contract, $8 a trade.

Decision two. Halve the trade count. 100 round trips instead of 200. Not by trying harder, just by declining the ones that failed the spread test.

Spread: $800. Commission: $260. Slippage, halved per contract because these are the liquid ones: $200. Assignment: closing before expiry rather than letting things run in, so most of it disappears, $100. Fees: $25.

Total $1,385, which is 5.5% of the account.

Same trader. Same account. Same ideas. The cost line went from 39.6% to 5.5%, and thirty-four points of annual return appeared out of nowhere, from two decisions that required no skill and no prediction whatsoever.

I want to be precise about what happened there, because it is easy to read this as a productivity tip. Those thirty-four points were always there. They were being spent, quietly, every single week, and the only reason they were invisible is that nobody sends you an invoice for crossing a spread.

Why this asymmetry matters more than it looks

Costs and edge are not the same kind of number.

Your costs are certain. No variance. They arrive on every single trade, in full, on schedule, regardless of the outcome. You can compute next year’s cost today, to within a few percent, and be right.

Your edge is uncertain. You need hundreds of trades before you can distinguish a real edge from luck, and most people never get a clean enough sample to know.

So you are financing a known, guaranteed outflow with a hoped-for, unproven inflow. Put that way, the sensible order of operations is obvious. Attack the certain number first. It is the only part of the equation you can move without needing to be right about anything.

And note which direction frequency cuts. Costs scale linearly with trade count, no exceptions, no discount for volume. Edge only scales with trade count if the edge is real, and the marginal trade is by definition the one you were least sure about. Halving your trade count halves your costs with certainty and removes your worst trades with high probability. That is a rare deal.

Two things that hide the number from you

“Commission-free” is a framing rather than a fact. If your broker charges nothing per contract, the cost has not gone away. It has moved into the fill quality, where you cannot see it, cannot itemise it and cannot compare it. A visible sixty-five cents is easier to manage than an invisible eight cents of worse fill.

Your P&L already nets it out. This is the deep one. Every cost in this post is already subtracted from the number in your account. You are not going to discover them by looking at your balance, because the balance is what is left after they have been taken. They are invisible precisely because they were never presented as a subtraction. They were baked into the entry and exit prices you accepted.

The only way to see them is to reconstruct them deliberately.

Today’s one thing

Open your last twenty option trades. For each one, write down two numbers. The price you paid to get in, and the mid at the moment you entered.

The difference, times 100, times the number of contracts, is what that trade cost you before it did anything at all.

Add up all twenty. Multiply by however many twenties you do in a year.

Ten minutes. It will be the most useful number you produce this month, and it is entirely yours to change.

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