Why Is the Assumption of No Transaction Costs a Significant Limitation of the Model in Real-World Trading?

The assumption of a frictionless market with no transaction costs is a major limitation because in reality, every trade incurs costs like brokerage fees and spreads. These costs can be significant, especially for strategies that require frequent trading, such as the delta hedging strategy that underpins the Black-Scholes model's derivation.

The model's failure to account for these costs means that the theoretical risk-free hedge it proposes is not truly risk-free in practice. The cost of implementing and maintaining the hedge can erode or eliminate the theoretical profits, making the model's output an idealized estimate rather than a practical, achievable price.