By the way, black swans are not that uncommon here in Australia... I see them all the time. The first time I saw one, I said to my wife.... wtf... a black swan!!!! no way!!! And she says, yep... the're in that lake every now and then...
Just read that paper... I think he doesn't understand the options market either SLE... good point. Initially it seems he's just saying all put options (OTM, ATM and probably ITM as well) are overpriced... basically because the market moves up over an extended time. So in that case of course you lose close to 100% of the premium, especially in ATM and OTM puts, less than that for ITM puts. And you make money on the same strike calls... That's just looking at a directional strategy. He doesn't discuss options the right way. In my view, from a market maker stand point who sets the price, an OTM put delta hedged to zero is a bullish strategy anyway. So when you think the market goes up, you buy OTM puts with delta hedge and you make money. If you would buy OTM calls delta hedged you would lose in this case... ATM call is the same as ATM put. The value is IV and you should look at IV to say whether options are overpriced or not. To me, again, it shows theoretical research lacks practical market insight.
Bond futures option skew varies with different regimes... Also depends on which futures. Lots of fun 'n games.
If you got that out of the paper you were either reading a different paper or didn't understand what it was saying. That's pretty much the opposite of the point of the author. This phenomenon is only observed in S&P 500 puts, not individual stock or other index puts, so it wouldn't be "basically because the market moves up over an extended time" or skew, both of which impact stocks and other indexes equally. I'm guessing the level of statistics were perhaps beyond your experience level, so it was easier to skip over all that and just claim the author doesn't understand the options markets. The interesting part is that the prevalence of this type of attitude could be why abnormal returns like this persist even when published, although in this case it's hard to capitalize on it without taking on significant tail risk.
I think you were talking to me too, right? I have read the paper and worked through his math when it first came out. His results more or less coincide with the general experience of every options trader - sell puts and you gonna be rich in the long run. However, you are likely to get fired along the way. There are many things that are profitable in the long run, but in the long run we are all dead. In the short run, which has margin calls and career-ending shoulder taps it's not a very viable way to make money. That discrepancy is what I am talking about when I say "he does not undestand the options markets". It just so happends that puts, especially OTM puts combine a garden variety of risk premia (realized vs implied has some risk premium, vol directionality due to leverage effect also calls for some premium, vega convexity has some risk premium, correlation skew has some risk premium etc). I have been doing it for a few years and even then I am not fully clear on what drives the supply and demand for various parts of the vol surface, especially in index vol.
You're funny... what's your background, stat research right? If this 'only' exists in S&P500 it will be arbitraged for a large part... Sure, skew/puts can be more rich in certain indices, but that usually has to do with liquidity. The more liquid, the less panic premium. This would also be a strategy to trade. If he says ATM put is overpriced... does that mean ATM call is overpriced too? Because in options trading they are one and the same... (put call parity). But the author goes on about puts only. He states buying a OTM put gives a neg return of about 95%? So full loss of premium... He is talking about naked puts... and compares that to naked calls... and his conclusion basically is that ATM calls do better than ATM puts (even with interest rate factored in which means ATM call has higher premium than ATM put). Now, why would that be??? Exactly, upward bias in the market during the sample....
Electrical engineering undergrad, requires a lot of stats classes which can apply to other things as well. If you read the maths part of the paper it is a 95% excess return (which is not the same thing as a 95% return), not sure why the - in front of it which obviously makes it appear negative. I'm pretty sure he didn't say that ATM calls have a higher premium than ATM puts, that would violate put/call parity and is a risk free arb. Abnormal returns aren't a risk free arb, they're just a higher return than is warranted given the risk you're taking on relative to the returns of other investments of similar risk.