>The claim is that this "good play" is avoided by most people because of >the risk involved.


It's also avoided by most people because, unless you're a Market Maker on an Exchange, the margins are high.


But it's still not a good play as you will soon see.


> I think some believe that calls are generally overpriced because people >like to go for jackpot scores. I have no idea whether this theory is correct >or not but I am sceptical for a few reasons.


This was true in the early days.


Nowadays, when a low price option is very overpriced, it could well be because, say, Morgan Stanley or Goldman Sachs, or one of their huge customers, might have a bit more information than you.


So, we are left with the anomaly that, many times the goofier the price of a low price option, the worse the sale is.


>One of course is the spread, which is very high on low priced, out of the >money options.


The Bid/Ask is much narrower these days.


>Also I would think that the price is kept down by those who are writing >covered calls. They are hedging. And in all gambling that I know of, >hedgers are taking the worst of it in return for reducing volatility.


Sometimes the hedgers make a low price option even more expensive. When they're worried that the SEC or an Option Exchange might suspect that they traded on inside info, they need plausible deniability.


They get this by coming up with a plan that requires some lopsided spread which involves buying a lot more of the cheap options than they sell of the expensive ones.


>Obviously if it is true that selling naked options is a bad play it would be >because of the rare calamity that would befall the naked seller.


Calamity is an understatement.


It's very, very sad.


I can still remember the faces of all of these people.


At least ten Market Makers who committed suicide because they went broke selling naked options.


At least five ex multi-millionaires Market Makers who are now broke. They originally made all their money by selling naked options.


One Market Maker and one retail broker who most would judge to be almost insane. e.g. one of them walks around the city going from McDonalds to McDonalds eating Big Macs. Again, it was selling naked options that did it.


> But because of its rarity, meaning that the great majority of naked sales >show a profit, might it not be that this widespread belief that selling >naked options is positive EV, is in fact wrong?


Sklansky's got it right.