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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: tom pope who wrote (3953)	3/3/1998 9:02:00 PM
From: Sonki	Read Replies (1) \| Respond to of 18691

what is MIV? A friend of mine suggested i short msft so i figured if msft was going to tank Dell will too. I found dell puts very expensive and was not worth the premium only for the sake of hedging.... I figured if i wait long enuf there will be a greater fool out there. sure enuf ... plenty of fools out there. why bother w. puts?

To: tom pope who wrote (3953)	3/3/1998 10:26:00 PM
From: Oeconomicus	Read Replies (4) \| Respond to 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

To: tom pope who wrote (3953)	3/4/1998 10:06:00 AM
From: TAPDOG	Read Replies (1) \| Respond to 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.