Empirically, option implied volatility tends to exceed realized volatility for most stocks most of the time. This is plainly visible if you plot both implied and historical volatility on the same chart, and even more obvious if you use moving averages for each to smooth the noise. This is the well-known “option seller’s edge”, an effect that has been quite persistent historically.
And not just for puts, due to put-call parity, this applies to calls as well.
Empirically, this strategy of selling a naked 30-day at-the-money SPY option (randomly a call or put) shows a positive expectancy, while the reverse strategy of buying the option shows the opposite. I’m not actually recommending you do this (because it’s easy to accidentally Bet the Farm by selling naked options), but it illustrates the edge.
As for why this should happen, yeah, the market is risk-averse, so there’s a risk premium for taking that risk off their hands. How big that premium is depends not just on the amount of risk, but the demand for insurance and the competition between insurers. If there were too many competing insurers to supply the puts (or if they were too big), then the margins would be too thin (but not negative!) for retail traders to profit from. But that’s not what we see happening. I wouldn’t say differing from “the average investor” is what matters, but from the investors who control the most money.
Empirically, option implied volatility tends to exceed realized volatility for most stocks most of the time. This is plainly visible if you plot both implied and historical volatility on the same chart, and even more obvious if you use moving averages for each to smooth the noise. This is the well-known “option seller’s edge”, an effect that has been quite persistent historically.
And not just for puts, due to put-call parity, this applies to calls as well.
Empirically, a covered short strangle portfolio not only beat the index, it had performance comparable to a hedge fund.
Empirically, this strategy of selling a naked 30-day at-the-money
SPYoption (randomly a call or put) shows a positive expectancy, while the reverse strategy of buying the option shows the opposite. I’m not actually recommending you do this (because it’s easy to accidentally Bet the Farm by selling naked options), but it illustrates the edge.As for why this should happen, yeah, the market is risk-averse, so there’s a risk premium for taking that risk off their hands. How big that premium is depends not just on the amount of risk, but the demand for insurance and the competition between insurers. If there were too many competing insurers to supply the puts (or if they were too big), then the margins would be too thin (but not negative!) for retail traders to profit from. But that’s not what we see happening. I wouldn’t say differing from “the average investor” is what matters, but from the investors who control the most money.