Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: tom pope who wrote (3953)	3/4/1998 10:06:00 AM
From: TAPDOG	Read Replies (1) of 18691

MORE TALK ABOUT OPTIONS The implied volatility is indeed skewed across strike prices. In the S&P 500 options, out of the money calls might be 14% and out of the money puts would be 20%. This is not inefficiency, but market opinion that down moves would be larger than up moves. In fact the data support this. The average move on a down day is in fact greater than the average move on an up day. More importantly, the number of times the S&P has a 5 standard deviation down day is much greater than the number of times there is a 5 standard deviation up day. Also, there is a greater natural constituency of call sellers than put sellers because people sell covered calls against long positions and the number of people long is obviously greater than the number of people short. Also, it is generally true that the farther out of the money the option, the greater the implied volatility because stock price changes turn out NOT to be normally distributed. They are log-normally distributed which means that the "rare events" of large price moves happen more than one would suspect from a normal distribution.

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