Are naked calls/puts insanely +EV? What am I missing here?

[RicoTubbs]

[ QUOTE ]
Moreover, as others pointed out, option markets are fairly efficient and on average the market price you see is fairly close to the true price.

[/ QUOTE ]

What do you mean by true price if you mean something other than market price?

There are too many degrees of freedom to say for sure what a theoretical value is. You've got the model itself (e.g., Black-Scholes), as well as the inputs to that model. You can only calculate a theoretical value when you assume the remaining N-1 values.

That's why you can't really come up with a theoretical value of options without specifying an assumption. So there's no such thing as saying the theoretical value of a Nokia 35 call with 30 days to expiry is $X. Rather, you can only say "using a Black-Scholes model and expected volatility of V (and other observed variables), the theoretical value is $X".

When you talk about implied volatility, you're simply seeing the missing degree of freedom fall out of the Black-Scholes value, but you need to remember that you're basing that implied volatility on the assumption that Black-Scholes was used to generate the market price, which isn't necessarily the case.