The problem is you assume you will hold untill expiry. A lot of things can happen between when you initiate the position and expiration. Look at it this way. If fair value for a particular option is 1.00 and the spread is 0.95/1.05, you buy at 1.05 and sell at 0.95. Let's say your winning ratio is 50/50. You win 2 or lose 2. In the long run you win 0.95 but lose 1.05 any way you cut it with 50% success. It makes no difference if you buy or sell the option. How this applies to real trading is that you may win 95% of the time selling options, but the 5% that you lose wipes out the 95% winning profits you made. In the end you're still a net loser. Flip for buying options. The only way to consistently win without an edge is to be a MM and buy/sell below/above fair value. Bookies don't lose (often).
Trading conversion/box arbs require rate-prediction; as you're not going to beat LIBOR w/o supplying liquidity, but that's as close as you're going to get. No offense guys, but most of the advice on this thread is dangerous.
" Let's say your winning ratio is 50/50......... "Assume you win 50% of the time and assume your 5% of loses wipes out your 95% gains." I'm sorry but I don't consider this to be proof of anything. I was thinking of an answer with a little more factual information in it.
Let me go against the crowd !!. I believe your friend is right. Yes there is a way but that 10%- 20% gain is not guaranteed. Say you have 1 million dollar. You put that in a CD with 5.5% interest which will make 55000 in a year and then you spend that interest in a rather risky (not naked) option strategies. You might blow up that 55000 or end up making 200K with that option money. So your gain will be almost unlimited (lets say 30%) with a 0% loss. My example was very simplistic. You can do more sophisticated stuff than that.
Let me tell you what you are missing. I have a good experience on that. 90% of the time, you will make little money and once you make a mistake, that will wipe out all your profits. It has happened to me many times. I shorted AMZN when it went up from 35 to 52 and I was sure I will be able to cover it in 45. It is at almost 100 now. As you said, it rarely happens but when it happens , it becomes nasty.
Of course you didn't count the inflation rate; and the principle debt holder of your CD will not default; and your banker will not run away with your deposit.
But this 'probability of success' is entirely offset by relatively shallow gains versus substantial losses in the 1/5 times the strategy doesn't work. ie -- sell naked calls on a stock before a 20-50% move up. That'll wipe months if not years of seemingly steady and highly probable gains out. It all balances out.
Just to add to what others have already said. The reason there's no edge in buying vs selling is that options are priced very efficiently these days, so you cannot beat the market by just selling options (or buying them, for that matter).
"The reason there's no edge in buying vs selling is that options are priced very efficiently these days, so you cannot beat the market by just selling options (or buying them, for that matter)." Of course I understand the efficiency of the pricing on the options. But the strategy of selling options can be oriented to the probability of movement and not the efficiency of the pricing. ie I used to sell puts on IBM. IBM has not dropped below $70 in many years and I used to collect $300-$500/ put on $70 puts. If you had been selling even just 5/ year and collecting $2000/yr for the last 5 years. I 've also sold puts on tasr and learned the hard way why trying to sell IV is dangerous. But with the right stocks, it has potential.