Volatility Smile is the phenomenon of implied volatilities tend to increase the further away strikes go from the money. It's pretty similar to Long-Shot Bias seen in horse racing odds where bets with great win/loss size ratios offer increasingly negative expectations for the backing bets. So yes, far away from the money options tend to be over valued with respect to likely future realized volatility.
Regardless, some traders/punters/risk management don't realize that regardless of potential winning/losing size ratios, a positive EV (Expected Value) is what's needed to make money.
A pretty simple demonstration of this is everyone's fear of selling put options, as the draw downs can be quite sharp. It has a positive EV, and does make money OVER TIME, limiting volatility of its return is the job of the trader. We can see how a pure put-selling strategy would've done over the years off CBOE's Buy-Write Index.
Regardless, some traders/punters/risk management don't realize that regardless of potential winning/losing size ratios, a positive EV (Expected Value) is what's needed to make money.
A pretty simple demonstration of this is everyone's fear of selling put options, as the draw downs can be quite sharp. It has a positive EV, and does make money OVER TIME, limiting volatility of its return is the job of the trader. We can see how a pure put-selling strategy would've done over the years off CBOE's Buy-Write Index.
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