There is no true best strategy. There are only good traders, not good strategies. ATM options are generally the easiest to price. They are the most liquid and there is a generally a consensus agreement on vol. As you go further out, you have less activity and a much wider discrepancy on what vol should be, hence the vol skew. You will also notice the variance of the actual vol on the strips (wings) is much larger than the ATM vols. In other words, the ATM vols stay relatively constant while the deeper strikes move around much more. So here is the deal, the ATM vols are pretty efficient for the most part (think of having a large data sample to analyze). The OTM options are very inefficient (very small data sample). The ATM options are not really underpriced or overpriced per se. You are really just dealing with the vig that goes to the MM. OTM options though are drastically underpriced. Not over any one single strike or option, but over a large range of strikes and options. You simply cannot price an unknown event into an option (because it's unknown). Now as to the reason why everyone doesn't just buy these options, this is very simple. For the most part, the hedge fund industry lives in an instant gratification society. From the hedge funds stand point; they don't have the luxury of having a bad month, or bad quarter in hopes of making the big score down the road. Many hedge funds can lose investors after just a few bad quarters (bad meaning underperformance relative to their peers). No one wants to hang around for the "grand finale" so to speak.
This is the primary reason this edge cannot be exploited. Think of it this way. Suppose an angel came down from Heaven and told you to stand in the middle of a frozen field outside the city of Chicago in the dead of winter every day for 3 hours. And one day in the future, this angel would return and give you a suitcase with 100 million dollars. So every day you stand in that cold, frozen field waiting for that angel to return. Surely you are ambitious and hopeful and believe the wait will be worth it. But after awhile, you will question your sanity. You will grow tired, you will begin to doubt and at some point, you will stop going to the field. Even if you later learned that the Angel eventually showed up, you wouldn't care anymore. Your desire is gone. That is the rub. Now many will say how one can possibly profit from such a strategy. Surely no one will want wait forever in the hopes of a 10 sigma event. And to that end, you would probably be right. But the moral of the story here is not to profit from such an event per se, but rather to make sure this event doesn't profit from YOU! The idea to understand here is we are all vulnerable to this "angel" coming, only not so much in an angelic form, but rather in the form of disaster. All it takes is one event (that no one saw coming) to wipe out a lifetime of earnings and hard work. The idea is to find ways to profit from the markets while at the same time, not blowing up from the "rare event".