Short Wings

Short wings will not get you far. Long wings will fly you when the winds pick up.

Vol traders are well aware of the volatility skew. Prices on far out-of-the-money options are often "over-priced" according to the traditional Black-Scholes model. The B-S model assumes constant volatility, so the idea of a vol surface is kinda backwards anyway. Assuming market prices, you can back out the B-S vol. B-S vol is usually higher on far out-of-the-money stuff.

The good academic might say these are over-priced and ought to be sold. Then kurtosis comes into play. Fat-tails make selling the wings quite dangerous. But a good simulation model that takes into account the fat-tails might still tell you the options are over-priced. Do you sell them?

Here's the trader's perspective. Being long the wings means once in a very long while you'll make a shit-load of money. Being short the wings means once in a very long while you'll be out of a job. Even if most of the time you're making a little bit of money by selling the wings, is it really worth betting your career? Sorta. . . not really. That being said, selling options is not necessarily a bad thing. In fact, selling options is quite profitable. It's the selling options for no real profit that seems dangerous.

A lot of non-trading circumstances are analogous. Don't be an ass-hole to random people you meet, you never know which might be your next boss--or be packing a gun and have rage issues (don't get me wrong, being an ass-hole in general is fine if you can pull it off. Just don't be an ass-hole randomly). Don't play hookey from work. Don't have unsafe sex with a hooker. Don't take chances unless you're getting the just reward for it.