Options and the Fair Game
There may be a statistical advantage to buying stock as opposed to shorting
stock, because the market has historically had a positive annualized return
over the long run. A statistical advantage to being either an option buyer or
an option seller, however, should not exist in the long run, because the
option market prices IV. Assuming an overall efficient market for pricing
volatility into options, there should be no statistical advantage to
systematically buying or selling options. 1
Consider a game consisting of one six-sided die. Each time a one, two, or
three is rolled, the house pays the player $1. Each time a four, five, or six is
rolled, the house pays zero. What is the most a player would be willing to
pay to play this game? If the player paid nothing, the house would be at a
tremendous disadvantage, paying $1 50 percent of the time and nothing the
other 50 percent of the time. This would not be a fair game from the house’s
perspective, as it would collect no money. If the player paid $1, the player
would get his dollar back when one, two, or three came up. Otherwise, he
would lose his dollar. This is not a fair game from the player’s perspective.
The chances of winning this game are 3 out of 6, or 50–50. If this game
were played thousands of times, one would expect to receive $1 half the
time and receive nothing the other half of the time. The average return per
roll one would expect to receive would be $0.50, that’s ($1 × 50 percent +
$0 × 50 percent). This becomes a fair game with an entrance fee of $0.50.
Now imagine a similar game in which a six-sided die is rolled. This time
if a one is rolled, the house pays $1. If any other number is rolled, the house
pays nothing. What is a fair price to play this game? The same logic and the
same math apply. There is a 
  percent chance of a one coming up and the
player receiving $1. And there is a 
  percent chance of each of the other
five numbers being rolled and the player receiving nothing. Mathematically,
this translates to: 
  percent 
  percent). Fair value for a
chance to play this game is about $0.1667 per roll.
The fair game concept applies to option prices as well. The price of the
game, or in this case the price of the option, is determined by the market in