Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: Oeconomicus who wrote (3963)	3/4/1998 8:20:00 AM
From: tom pope	of 18691

>>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?<< Bob - The easy answer is yes - volatility skew is a pattern where implied volatility rises or falls as you move up or down the strike prices. Generally speaking, the volatility of index options these days falls as you go up the strike price ladder, and rises as you go down. That was not the case pre 1987. Theories? That's the hard part, or at least it's hard to summarize. My bible, McMillan on Options discusses it starting on page 455. His two main reasons are restrictions by brokers on naked selling by individuals after the 1987 crash; and hedging by institutions who buy out of the money puts (lower strikes) financed in part by the sale of out of the money calls (higher strikes).

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