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Strategies & Market Trends : Roger's 1998 Short Picks
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To: tom pope who wrote (3953)3/3/1998 10:26:00 PM
From: Oeconomicus  Read Replies (4) of 18691
 
Perhaps I'm missing a link in ur argument.

How many people do you think actually write puts when they are bullish? How many shorts here hedge by writing covered puts?

My point in post #3923 was that the use of puts for hedging by bulls and speculating by bears (both of whom would be put buyers) probably far exceeds the writing of puts by speculating bulls or hedging bears. As I said, a speculating bull would tend toward call buying instead (if they don't just go ahead and buy the stock). I also supposed that short sellers, outside of our virtual club here, are relatively rare and that those who write puts as a hedge are even more rare. As a result, in a normal market and in the absence of sufficient arbitrage activity, demand would exceed supply of puts and prices would tend to appear high. I went on to hypothesize that the extended bull market has led to complacency among institutional investors who might otherwise invest using market neutral arbitrage strategies. By their sticking with bullish strategies, there may be insufficient capital employed in arbitrage to eliminate the systematic overpricing of puts.

Just a theory.

Now a question for you. Can you explain "volatility skewing"? Are you saying that the implied volatility rises/falls as you move along various strike prices of the same security? Higher as you move farther in the money or out? Theories?

Sorry folks for turning this into an option thread for today (We could continue this elsewhere I suppose).

Bob
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