How Does the Bid-Ask Spread on the Underlying Asset Affect the Cost of Delta Hedging?

A wider bid-ask spread on the underlying asset directly increases the cost of delta hedging. Delta hedging requires frequent buying or selling of the underlying asset to maintain a neutral position.

Each trade incurs a cost equal to half the bid-ask spread. For illiquid assets with wide spreads, this transaction cost quickly accumulates, making the hedging process expensive.

Market makers compensate by widening the spread they quote on the option itself.