Every time you buy or sell stock to rebalance your hedge, you pay a little toll. The bid-offer spread. The commission. The market impact. These are transaction costs, and they are the silent killer of options hedging strategies.
You know how every finance influencer tells you “minimize your trading costs”? Cool advice. But nobody tells you how to actually measure those costs. That is what chapter 21 is about. It turns out measuring transaction costs is surprisingly hard, and every method has problems.
Harris calls chapter 14 the most important chapter in the book. Bold claim for page 297, but he backs it up. The lesson is simple and painful: uninformed traders lose money no matter what they do. Not because they pick the wrong side. Because they trade at all.
You cannot manage what you cannot measure. Harris opens Chapter 21 with this principle and then spends the rest of the chapter explaining just how hard it is to measure transaction costs properly. The basic idea is simple: compare what you paid to some benchmark price. But the choice of benchmark determines everything, and every benchmark has flaws.
Volatility is one of those words that everyone uses but most people think about too simply. Prices went up and down a lot today? Volatile. VIX is high? Volatile. Your crypto portfolio lost 40%? Very volatile.
Book: Systematic Fixed Income: An Investor’s Guide Author: Scott A. Richardson, Ph.D. Publisher: John Wiley & Sons, 2022 ISBN: 9781119900139
Larry Harris opens Trading and Exchanges with a simple observation: markets are fascinating. They change constantly as prices adjust to new information, as winning traders replace losing traders, and as new technologies evolve. That is a pretty understated way to describe the most complex competitive arena in the world.