Publication Type
Working Paper
Version
publishedVersion
Publication Date
12-2025
Abstract
We examine the impact of transaction costs on the profitability of long-short portfolios of delta-hedged option returns. Of the 24 portfolio sort variables studied, 17 generate positive and significant gross returns, but none remain profitable after accounting for trading costs. We propose a cost-mitigation approach that restores profitability to 7 key portfolios. Furthermore, we demonstrate that the choice of delta-hedging frequency has a first-order impact on transaction costs. Our findings underscore the central role of implementation costs in shaping the investment opportunity set in equity–option markets, highlighting the need to account for transaction costs when evaluating option-based strategies.
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
First Page
1
Last Page
85
Identifier
10.2139/ssrn.4806038
Publisher
Singapore Management University Lee Kong Chian School of Business Research Paper
City or Country
Singapore
Citation
O'Donovan, James and YU, Yang.
A transaction cost perspective on option anomalies. (2025). 1-85.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7872
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.4806038