The present disclosure is directed to a system and method for optimizing operation of a wind turbine. The method includes providing a voltage regulator between a power grid and the wind turbine. The voltage regulator is configured to control at least one voltage condition of the wind turbine. Another step includes monitoring, via one or more sensors, at least one operating condition and at least one voltage condition of the wind turbine. The method also includes comparing, via a controller, at least one of the operating condition or the voltage condition with a predetermined threshold to determine a margin-to-threshold ratio. Thus, a further step includes controlling the voltage regulator based on the comparison so as to maximize the margin-to-threshold ratio.