Let me suggest reading
this thread and, in particular,
this post.
Interesting posts. Nice, clear example (two $10 stocks, one goes to $5, one goes to $15), and I agree, many option sellers would think they 'won' over the stock buyer and they would be wrong. But I'm not sure you can extrapolate that example to an entire portfolio (and maybe you did not intend to).
You are absolutely correct that you only get a (relatively) high % premium on a (relatively) highly volatile stock. Some option sellers don't want to believe this fact and think they can get a high premium on a 'safe' stock. With few exceptions, they would be wrong.
But, the distribution of stock movement is roughly a bell curve. Very many of the highly volatile stocks that I have sold options against moved very little during the option period (as one would expect from a bell curve), and of course, others moved a moderate amount and others pushed the tails.
When you throw in a bunch of stocks with high implied volatility (and premiums to match), and see that a good number of those stocks trade within a more narrow range, your example falls apart a bit. Though, it is still a very good example to make your point, I just don't think you can apply it so directly to an entire real-world portfolio of option selling.
... how option sellers convince themselves they're making money on every trade yet somehow end up with less money. I assure you it's not an uncommon belief, especially among covered call writers.
You are preaching to the choir there. I'm with you on that. I engaged in a long, long 'discussion' on that very topic on this forum. I do however, think there are fundamental reasons why one
could make a little bit of extra risk-adjusted return. In practice, the difference may be too small to really benefit from, I think it depends on market conditions - if the market is over-estimating volatility, option sellers benefit. Can one tell when volatility is 'over-priced'? That sounds to me like trying to determine when a stock is 'over-priced', I'm skeptical.
Let me repeat my question for this case: Who do you believe is selling what those speculators are buying?
My analogy is that call buyers are like gamblers, put buyers are like insurance buyers. Both
should realize that they are going to lose money on average, but they pay a premium to play 'the game', one in the hopes of a big gain, one in the hopes of hedging a large risk. The casinos, ins co's, and the option sellers collect this premium, and if they could not make a reasonable risk-adjusted profit, would not offer the product.
I tend to think that options are priced this way by the market, the sellers need to be rewarded for their risk, or they go home. But, they can't make a 'killing' at it, or the players wouldn't play, and the market would quickly adjust to any 'excess' profits anyway, with more sellers coming forward to cash in. I am *not* convinced that an individual with a limited number of positions in a portfolio can expect to cash in on that - a few outliers (which can only hurt, not help, the option seller) might easily wipe out the benefits.
So 'who' is selling? Those that think they can make enough in premiums to provide a higher risk-adjusted return compared with an outright buy. That doesn't mean they are right

adit/add: The option sellers also need to have the capital to back their sales (option buyers only need to come up with the premium), and need to be of the mindset to take a smaller, potentially more consistent return, versus a big win. I think that puts them in the minority, and supply/demand might be in their favor.
A much shorter version of all this : There is no free lunch.
-ERD50