Transaction Costs and Cost Mitigation in Option Investment Strategies

We examine the impact of transaction costs on the profitability of long-short portfolios of delta-hedged option returns. Out of 24 variables studied, 17 generate positive and significant gross returns, but none remain profitable after accounting for trading costs. We explore cost-mitigation strategies and propose a novel approach that outperforms existing methods, restoring profitability to 7 long-short portfolios. Our findings emphasize the crucial role of implementation costs in assessing the investment opportunity set in equity-option markets and underscore the importance of incorporating transaction costs when evaluating option-based strategies.