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

To: Oeconomicus who wrote (3963)	3/3/1998 10:49:00 PM
From: Mr. E2u	Read Replies (1) \| Respond to of 18691

To all: I've never shorted a stock before but I feel that now that earning warnings will be coming in I'm looking to go short some. I think that the Asian crisis will re-ignite if only briefly, so does anyone know some good shorts that got hit hard when the Asian crisis first came about? Preferably stocks that have since recovered quite a bit since then. If someone could please compile a list of short candidates that the contributors on this thread are watching or at least list their own short positions........I would appreciate it greatly. Thank you in advance Pheonix

To: Oeconomicus who wrote (3963)	3/4/1998 2:00:00 AM
From: hasbeen101	Respond to of 18691

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? OFF TOPIC, BUT IMO ESSENTIAL INFO FOR TRADERS Yes, the graph of implied vol against strike price is known by the rocket scientists as a 'smile' exactly because that is the normal shape for the graph. I guess this typical shape indicates that people are prepared to pay a higher premium for riskier bets, or it may just mean that Blck Scholes is an imperfect model. As a fascinating aside, Harry Markowitz, one of the inventors of Modern Portfolio Theory, did a study which showed that long-odds horses are actually still on shorter odds than they should be, based on the average payout to bettors. People are prepared to pay extra for the thrill of backing a long-odds horse. This takes us into the fascinating area of behavioural finance. The interesting thing about index options is that they have consistently had higher implied vols for lower strike prices. This seems to be one of the few academic pieces evidence of market inefficiency, which as Pancho always points out is the only thing that could make trading worthwhile (otherwise you should just buy an index fund).

To: Oeconomicus who wrote (3963)	3/4/1998 8:20:00 AM
From: tom pope	Respond to 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).

To: Oeconomicus who wrote (3963)	3/4/1998 10:14:00 AM
From: Bilow	Respond to of 18691

I'll take a swing at volatility skewing. It wouldn't be theoretically necessary if the market really were a random walk with normal distributed stock changes each day. But it turns out that large stock price excursions are more common than one would predict based on the frequency (i.e. distribution) of small stock price excursions. Consequently, options well away from the money typically show a higher implied volatility than options near the money. If this were a pricing mistake, then it would be possible to take advantage of it by selling the over-priced options. If this were possible, (even though it would take a lot of equity for you or me) then you can be sure that the math quants at the big houses would be arbitraging it away. The reason is that the market makers for options have to provide both sides of each option, both buyer and seller. Actually, the thing that rips me is the high spreads for deep out of (and deep in) the money options. Those are what prevent them from being traded a lot more. -- Carl