Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: Bilow who wrote (3945)	3/3/1998 8:14:00 PM
From: Oeconomicus	Read Replies (2) of 18691

Carl, my point was that, in the case of puts, demand among investors for long positions probably far exceeds supply, i.e. investors wanting short put positions. Without sufficient, competitive arbitrage activity, that would tend to make puts appear overvalued. Of course the option specialists must execute trades at their quoted bid and ask, and do so for their own account if there is not enough activity to offset the trade with another investor's trade. They would hedge their positions with other options and securities of course. But the spreads can be wide and arbitrage opportunities due to overpriced puts can remain if there is not enough arb activity. In many listed stock options, there is not enough activity to arbitrage away the inefficiencies or mispricing. In more active options, particularly index options, there is plenty of competitive arb activity and I would bet that you wouldn't find the same overpricing of puts. My point was that there are limited funds dedicated to market neutral, arbitrage activities (due in part to the bull market) and that this may explain what Cox or Rubinstein found and Damien mentioned. Hope that clears things up. Bob

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