Making a nickel here or there isn't really an edge. And good luck trying to do it for size. Besides what I have found is that you typically have to let the deep itm spread expire to collect since it is very hard to get a good price to close out.
Hey Jerry, just wanted to point out that you are not actually the "insurance agent" in this scenario. you are giving up the luxury of being the agent to the market maker. That being said, I personally do believe there is money to be made in selling options, and the money comes from reduced volatility. We all know that sequence of returns effects total return, I personally think selling options is a good way to reduce volatility and still come out with a higher average return. I've also found a way to leverage options without paying margin interest which has obvious benefits to it as well. Also, one last thing. I'd say 90% of all insurance companies underwrite at a loss, in your example that would mean they sell the options at a loss. They way insurance companies make money is by investing the float, which we do not have such luxury to take the premium and instantly invest it. Well most people don't...I do
To the risk neutral investor options are generally over priced. Stocks are generally underpriced (more controversial). But how many investors are truly risk neutral? So you have ask yourself how overpriced does an option be for you?
Sure, I agree it is an imperfect analogy... I just think on the sell side there are real advantages if done right. To begin with if one sells at hi vol/ hi premiums the odds are in your favor, especially if you can get some clean short directionals in the mix. And sometimes even if things aren't going well good ol' Theta bails you out. I do a very occasional long straddle but that's it as far as longs. I just feel all warm and fuzzy if I have 5 or more small positions on and the Theta is rolling in... YMMV, good comments .. Jerry
yeah the IV ranking is bullcrap. For example, last year was a fantastic year to be short vol despite VIX being super-low. That's the nature of contango. I'd rather be shorting vol when it's low than when it's high, because if it's high; it's often so for a reason. If it's low, markets are calm and one can steadily collect the premium. When vol is high it tends to be erratic and often go even higher. There's something called vol clustering or whatever that backs this up...(high vol is usually followed by high vol, whilst low is followed by low vol)
High volatility inflates the option premium (the higher the percentage of Implied Volatility, the higher the option price), which is usually a good thing for option writers (sellers).