MK, The further out of the money, the less the formulae work. For example, LTCG was selling options that had "zero statistical chance" of ever having any realized value. They sold a lot of them as they had no chance of losing money. This happens all the time. I had a buddy who worked for a major non-taxable portfolio and all he did was sell out of the money call options on stocks. Far out. For eights, quarters, and sometimes a half a point. He was a hero during the late 70s. He made them look like geniuses. Then August of 1982 happened and he blew up.
I think they have to be two or more strike prices out to be severely mispriced. Then they get out on the far tails of the bell curve.
The only "empirical" study is one that I have complained about many times. It is the one every university professor quotes that shows that 85% of all options expire worthless. Ergo, sellers win and buyers lose. What is bogus is they do not compute how much is made or lost. So, if my buddy is making quarters of points by selling, and I'm losing those quarters, but then I make 10 points when I'm right every once in a while, I win.
I think an empirical study is nearly impossible as there are too many things happening to look at just the options. So, a person who is short a stock and long a call for insurance, will be a winner if the stock goes to zero. But the study will show he lost money on the call. Like life insurance, there are some premiums on which you do not want to realize gains. |
