Could you please correct which parts of my reasoning are wrong?
Let's suppose that I know for sure that my estimate for a stock volatility is right (I have a crystal ball) and that it will be for sure constant until the maturity of the option.
I plugged my volatility, the risk free interest rate and the other variables into the Black Scholes equation and got a price of 80. The market price is 100.
The same way people derive an implicit volatility by solving for sigma to match the BS with the market price, I solve for r, the risk free interest rate, and I get a value of .6.
My conclusion is that I can take advantage of this mispricing by properly hedging in almost continuous time and having an annualized return on these transactions of .6, ignoring fees and liquidity issues.
Is this correct? If so, why people give so much value to implied volatility instead of trusting in their volatility estimates and realizing that mispricing should in fact exist in the market as a sort of premium to reward the work of hedging continuously, the fees and liquidity issues and the risk of not seeing the model assumptions working in practice?
Ignore issues like transaction problems and fees (I'm a robot, I don't make mistakes and the broker is my friend, there are no fees). The real point is the last paragraph. Why option pricing seems to be so much focused in assuming that arbitrage is absolutely impossible, even considering fees and assumption problems, always trying to find a pricing method that will make the market 'right'. It seems so clear to me that high risk free returns should exist to compensate the million problems involving continuous hedging.