“There is no edge in selling options“
I’ve heard this many times as an argument to try to pick apart a naked option selling strategy, but it’s simply not the case.
First there are the basic principles of commerce at play here. If you were in the business of selling something, how long would you be able to stay in business if you sold everything at cost? Every operation has costs to absorb, and in the case of traders that could be commissions, exchange seats, trader salaries, etc. Even if you had zero operational costs, what would be the point in taking on risk at its par value? Conversely, consumers expect that vendors markup their wares to be able to exist.
The same holds true for options pricing. There is a vig, or markup slightly above what the realized volatility is expected to be. This needs to exist for a seller to even be interested is accepting the risk from the outset.
Markets move and are largely unpredictable, rarely does realized volatility equal the implied volatility at time of option writing. The vig ensures that with enough iterations, there is an expectation of profitability that warrants participation. Without this vig, the option writer is accepting par value for unlimited risk with limited return and the buyer is getting unlimited return potential for limited risk. This leaves the buyer with an obvious edge over the writer. An overstated IV levels the playing field