ATM strikes are liquid; far OTM and far ITM are thin with wide spreads. A signal on a thin strike costs more in slippage than it earns. The model should weight liquidity into position size and avoid illiquid strikes near expiry.
Real cost = premium + spread + impact. Backtests that ignore slippage lie. Include a slippage model (e.g. 0.1 percent ATM, 0.5 percent wing) in walk-forward to stay honest.
Q: Which strikes are liquid?
A: ATM liquid; far OTM/ITM thin with wide spreads.
Q: Why include slippage?
A: Backtests ignoring it overstate returns.
Q: How to handle thin strikes?
A: Size down or avoid; factor spread into cost.
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By Shakti Tiwari · Options AI research pillar. NISM XII certified. Educational only, not investment advice; verify before acting.