I suspect nobody "knows" the right answer in the sense in which you mean it. The reason is it is impossible to arrive at a generalized assumption without, instead, choosing a specific strategy.


If you were, at 10:00 on Monday morning, to hit the bid in every US exchange-traded call in which there was a published bid, and do only the size at the inside bid, would you expect to make money - even ignoring the "cost" of volatility - if you held them to expiration? I don't think so.


But, on the other hand, I certainly could not guess! And any prolonged study of the problem performed by actually selling calls pursuant to the strategy, would at first drive down their price, and then increase the apparent utility for calls - so that calls would likely be overpriced the month the study ended!


There have been numerous academic studies as to the generalized pricing of options - and many people who "know" one thing or the other as a result - but they are all hogwash. It's like trying to attribute the residual of why men earn more than women "with the same education."


Men and women with college degrees, the men earn more. But wait, men are more likely to also have masters degrees. Men and women who have masters degrees, men earn more. But wait, men are more likley to have masters in econometrics or chemistry, women in sociology.


Men and women who both have degrees in econometrics, there is still a residual difference. To what do we attribute it? And can we then extrapolate this to men and women who both have only bachelors in psychology?


So, in calls, if we choose anything apart from the strategy I proposed, you are left wondering, is it something about our strategy, or something inherent in calls themselves? Plus, another concept you miss is asymmetric utility, which I addressed briefly in the following post:


http://www.twoplustwo.com/cgi-bin/ne...s.pl/read/1627


When I go to the grocery store, I find that toilet paper is almost always selling way too cheap, and so I buy some every time! But if I were to do a study which suggested that toilet paper is too cheap, and the grocery store should raise the price to where I would be indifferent to doing without it or finding a substitute, I would not escape the ridicule that the answerer of your equally-silly question will escape.


Is it possible to make a profit in the options market? Yes, and nor is it a zero-sum game. Are calls, in general overpriced? Well that depends on whether you - as an individual - in general, have no use for calls.


Are there individual suckers who, in specific instances, probably pay more than they should for calls? Yes. If there were a simple, or academic-texture strategy, for selling a diversified portfolio of calls, would entire companies evolve to take advantage of it, as they did in the 1980's? Yes.


I honestly believe that, when I worked as a runner serving an options pit - and most order flow was in contracts on the move - that a big part of my job - upon which the very fate of the exchange rested - was moving just slowly enough that 50% of the paper orders I carried were stale by the time they arrived at the pit.


Then, upon my delivering a customer limit offer below the "fair" bid for instance, competing market-makers would all bid higher than where the customer "would have been willing" to do business. But few of them would bid at a price were they could not make money, at least those who did wouldn't last for very long. What is their replacement rate?


All economic profits are the result of asymmetric friction. If there are a million firms with fixed overhead invested in plant and equipment to sell calls, and then the sucker call-buyers dry up, and I can turn buyer rather than seller faster than anybody else, I win. Or, if they can all either buy or sell, but are in business to do one or the other, I can kick back and pick and choose - and pick them off.


Or something...


Point is, simple answers make suckers.


eLROY