How Does the Bid-Ask Spread on the Underlying Crypto Asset Impact the Cost of Re-Hedging OTM Options?

The bid-ask spread on the underlying crypto asset significantly increases the cost of re-hedging OTM options. OTM options require frequent re-hedging due to their volatile Gamma.

Each time a hedge adjustment is made, the trader must cross the bid-ask spread, incurring a transaction cost. A wider spread means higher costs, which can quickly erode the potential profit from the option trade.