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What Is the Practical Limitation of Delta Hedging When the Underlying Asset Is Illiquid?

The primary practical limitation is slippage and market impact. When an illiquid asset's price is highly sensitive to trade size, executing the necessary delta hedge (buying or selling the underlying) moves the market against the market maker.

This execution cost can erode the profit from the options trade, making the hedge ineffective or too expensive to implement frequently.

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