You are trying to capture the volatility risk premium. If you think about it, the introduction of the Heston model is not necessary.For example, the implied vol associated to OTM SPX puts is well-known to be higher than justified by the historical SPX time series.The actuarial expected profit from selling such puts repeatedly is significantly positive. So, why not just sell those and do your delta-hedging?The answer is: you will indeed likely capture that risk premium "on average". But you won't capture it risklessly and when your strategyis losing the most, that when equities in general will be crashing. That's why it's a "risk premium" and not an "inefficiency" or an "arbitrage opportunity".I will guess that, if you tried your Heston model strategy, the results would generally be similar to the SPX put case.As a general rule, risk premiums are drift effects and drift effects do not translate into arbitrage opportunities. However, you don't need me. You can easily simulate your strategy under some assumptions and see the pattern of the gains and losses.Be sure to include highly stressed markets, perhaps with a crash or two, in your simulations.
Last edited by Alan
on March 5th, 2015, 11:00 pm, edited 1 time in total.