Fooled by randomness by Nassim

Is he making a case that buying OTM options is more profitable than selling them?

 

In a way yes...not as simple as just buying deep otm though

 

Do you have any experience doing so?

 

I think the hardest part of buying OTM options is deciding when do I get out.

 

The point is Volatility is usually underpriced.
Because they usually underestimate fat tails.
... The lower the probability, the less efficient.

If you’re short vol then you earn 99% of the time.
But if you buy vol you bury them 1 out of 100 times.

 

Volatility is usually underpriced, How did you get to that conclusion?

 

Here is an “AMA” on Reddit

Opss

 

Exactly. Looking at the current V shaped recovery one holding too long those would have ended up losing money, instead of making gazillions.

 

Exactly!

 

Stock market returns exhibit a more leptokurtic distribution vs a normal distribution. Leptokurtic distributions have fatter tails (higher kurtosis) which is a better representation of reality The tails, outliers, and black swans are always mispriced because most option pricing models assume a normal distribution in the returns on the underlying.