You make a valid point in that options sellers take a cut most of the time! However i do not fully agree with the conclusion and want to push back a little:
(1)"options traders overpay for volatility nearly 87%" Well the winrate alone tells us not enough about the profitability of buying options without knowing the payoff as well. If option buyers win only 13% of the time but have 20x payoffs in case of a win then this would be a very profitable strategy, just hard to stomach. To be clear: i dont expect option buyers to have such payoffs i am just saying part of the picture is missing (the payoff)
(2) You conclude that because IV is higher than realized vol most of the time, that option buying is a suckers game. That would only be true if both Sellers and Buyers were delta hedging. Many buyers don't delta-hedge. If you buy a call unhedged then you can be profitable if the underlyings price drifts far enough beyond your strike. So you can overpay for IV relative to realized vol but still make a profit because an asset can drift very far even on relatively low vol.
Always enjoy your work and am interested whether you think my pushback is valid.
And to be clear i am not advocating for option buying as a profitable strategy by itself and maybe it still is a suckers game
Noted. Traders overpay for volatility. The chart is clear. If some have a winning strategy, despite that, it’s fine with me. The article was not about winning strategies, which actually exist, but about what it says in the title.
Great read Michael. We also heard many of times this painpoint amongst retail. We just built an app which lets you filter the full options universe by favourable IV to RV ratio. We hope this might be a starting point to help people avoid overpaying for volatility in the future.
You make a valid point in that options sellers take a cut most of the time! However i do not fully agree with the conclusion and want to push back a little:
(1)"options traders overpay for volatility nearly 87%" Well the winrate alone tells us not enough about the profitability of buying options without knowing the payoff as well. If option buyers win only 13% of the time but have 20x payoffs in case of a win then this would be a very profitable strategy, just hard to stomach. To be clear: i dont expect option buyers to have such payoffs i am just saying part of the picture is missing (the payoff)
(2) You conclude that because IV is higher than realized vol most of the time, that option buying is a suckers game. That would only be true if both Sellers and Buyers were delta hedging. Many buyers don't delta-hedge. If you buy a call unhedged then you can be profitable if the underlyings price drifts far enough beyond your strike. So you can overpay for IV relative to realized vol but still make a profit because an asset can drift very far even on relatively low vol.
Always enjoy your work and am interested whether you think my pushback is valid.
And to be clear i am not advocating for option buying as a profitable strategy by itself and maybe it still is a suckers game
Noted. Traders overpay for volatility. The chart is clear. If some have a winning strategy, despite that, it’s fine with me. The article was not about winning strategies, which actually exist, but about what it says in the title.
Great read Michael. We also heard many of times this painpoint amongst retail. We just built an app which lets you filter the full options universe by favourable IV to RV ratio. We hope this might be a starting point to help people avoid overpaying for volatility in the future.