When trading costs erase your gamma edge

Question

Your delta-hedged long-gamma book has a genuine edge: realized vol is running above implied, worth about $\$ 50 $/day in gamma scalping. But each re-hedge costs you$ $5 $in spread and fees, and if you hedge on every tiny wiggle you'll trade$ 20$ times a day.

What's your net P&L if you over-hedge, and what's the fix?

Accepted Answer

Over-hedging. Twenty re-hedges at \5 each is \100/day of cost. Against a \50/day gamma edge: 	ext{Net} = \50 - \100 = -\50/	ext{day}. A real, positive edge turns into a daily loss purely from friction. The gamma scalp is right; the implementation destroys it. Crucially, hedging more often does not increase your edge much, the gamma P&L you capture is roughly fixed by how much the stock actually moves, but it linearly increases cost. The fix: hedge in bands, not on every tick. Instead of re-hedging on any move, let your delta drift within a tolerance band and only trade when it breaches the …

When trading costs erase your gamma edge

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