Do you have health insurance? Car insurance? Any form of insurance? Well, if you do, you would know that insurance rates have gone ballistic the last few years. For all practical purposes, you are probably grossly over paying on all your insurance. In other words, you are a long premium holder getting a bad deal. Or so it would seem. The insurance companies, the premium sellers, are raking it in selling you this premium, or so it would seem. What you don't see are the substantial increase in medical claims the last couple of years, or the large outlier events if you will. They are there. Most people don't see them because we are not looking for them. Everyday there are catastrophic moves in stocks, just about every day. Moves large enough, that if you sold enough size in naked straddles, you would be out of business. But chances are, if CNBC doesn't mention it, or if you don't have money on it, it will pass you by. In your mind, it doesn't exist. The proverbial if a tree falls in the forest and nobody hears it, did it really fall? If you sell enough of these, you will hit a pothole, a big pothole. The profits you earn on these will be tiny, but they will occur often. The losses will be catastrophic. Look at how many insurance companies go out of business every year, especially during hurricane season. This is despite the fact they are charging their customers with serious over charges. The bottom line is, you can't sell enough premiums at high enough prices to cover the debacles. All large unexpected price moves are seriously underpriced. Sometimes to the magnitude of 50 to 100 times. The irony is, by spreading out and doing a lot of these, you are actually increasing the probability of blowing out.
Think about it like this. Say you were going to have unprotected sex with another woman (assuming you are a male). Let's say there are 10k women to choose from in a certain subset. Let's say 100 of them have AIDS. Your best bet is to pick the hottest chic and have a go at it. Assuming there are no other men entered into the equation where we then enter a game theory situation where the most men will choose the hottest women. If it's only you and you know 100 of these women have AIDS, you certainly do not want to sleep with all of them! In fact, the greedier you get by sleeping with more and more women, the higher the probability you have of contracting AIDS. Your optimal situation would be to select one. Every additional one you select is not spreading your risk around, but increasing it. So no matter what you do, as long as you sell naked options, you are exposing yourself to catastrophe. It does not matter the duration in which you hold the short option. And it does not matter if you do 1,000 of them, sooner or later, the hurricane will come. There are a million ways to make money trading that do not carry the disaster tag with it. It's the same reason young people opt to go to medical school or law school instead of becoming a drug dealer even though it pays the same and in some cases more. No one wants the extra risk if they can avoid it.
Think about it like this. Say you were going to have unprotected sex with another woman (assuming you are a male). Let's say there are 10k women to choose from in a certain subset. Let's say 100 of them have AIDS. Your best bet is to pick the hottest chic and have a go at it. Assuming there are no other men entered into the equation where we then enter a game theory situation where the most men will choose the hottest women. If it's only you and you know 100 of these women have AIDS, you certainly do not want to sleep with all of them! In fact, the greedier you get by sleeping with more and more women, the higher the probability you have of contracting AIDS. Your optimal situation would be to select one. Every additional one you select is not spreading your risk around, but increasing it. So no matter what you do, as long as you sell naked options, you are exposing yourself to catastrophe. It does not matter the duration in which you hold the short option. And it does not matter if you do 1,000 of them, sooner or later, the hurricane will come. There are a million ways to make money trading that do not carry the disaster tag with it. It's the same reason young people opt to go to medical school or law school instead of becoming a drug dealer even though it pays the same and in some cases more. No one wants the extra risk if they can avoid it.