Comment by zozbot234
19 days ago
AIUI, there's nothing wrong per se with treating the "market opinion" of the volatility as a subjective probability, since that's effectively what it becomes given sensible no-arbitrage constraints. Just keep in mind that "bad" states of the world will be heavily overweighted in the resulting subjective expectation, for the risk-adjustment reasons mentioned in the OP.
Definitely. As someone once explained it to me, you always overpay for insurance and you're right (from a marginal utility/risk of ruin standpoint) to do so. That's why the vol skew is pretty much always such that crash puts are more expensive than oom calls.