There are volumes written on this subject, though Taleb's "Dynamic Hedging" is as good an introduction as any. The short explanation is that, in theory, the payoff of any vanilla option can be replicated by trading the underlying asset. For a while, quite a long while even, this kind of trading can look profitable. There are many variations on this, such as trade frequency and holding interval, but in the very end you realize you are being compensated for an asymmetric risk. That is the risk of sudden changes of price while you happen to have a position open, among many other risks. I would say that 99% of the "newly discovered" profitable systems I have seen over the last 20 years were unwittingly replicating a short vanilla or exotic option without understanding the risk.