Wouldn't there be an inherent edge to shorting OTM puts and keeping delta neutral with underlying? If ATM implied is best guess for forward stat vol, then this seems a case of "overvalued" options. For the SPX, 20d puts implieds are ~ 500bp > than ATM. Comments?
who said ATM implied is best guess for forward stat vol? the vol curve is curved for a reason. Panics and manias.
Shorting puts means buying deltas, so to neutralize them you need to sell the underlying. Synthetically it means selling naked calls. The IV skew is caused by pricing in outlier events (black swans), and by the higher slippage due to the thinner activity as you go further from the money.
If you "knew" the future stat vol for the spot was going to be less than the ATM implieds were telling you when the trade was put on, then shorting the ATM put, keeping delta neutral with the underlying ("frequently enough") and guiding the trade through to expiration should yield a profit. Why wouldn't this work with an OTM put handled the same way? It seems like you've given yourself an advantage with the skew, assuming you can delta hedge appropriately.
The odds are that you'll make a small a mount of money for several trades, then you'll lose a larger amount once (a gap in price and / or IV) that will wipe out all your accumulated profit. This is the old argument between far OTM seller and buyers of premium. Look up Nassim Taleb and Victor Niederhoffer: http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
Isn't the difference that VN sells naked, no hedge. I'm proposing hedging and expecting that while adjustments with underlying will lose money, net position at expiry will be positive.