Option Implied Volatility Skews

1
Option Implied Volatility Skews

• Pinch Hitting for Bud Haslett
• Prof. Mike Stutzer
• Burridge Center

2
Typical Stock Index SkewMay Reflect
Crash-O-Phobia
OTM Puts
OTM Puts
ATM Puts
This Smirk Skew is also in T-Bond Options
3
Recent Smirk in SPX Puts
WSJ Headline, November 3, 2008 October Pain Was
'Black Swan' Gain

• You may think OTM Index Puts are Overpriced and
  will always expire worthless
• Enter Nassim Taleb, and his Universa Hedge
  Funds.
• -- Universa buys far-OTM options on stocks and
  stock indexes
• -- It keeps more than 90 of
  assets in cash or cash equivalents
• -- Hence it either breaks even
  or loses small amounts in most months
• while waiting for
  periodic, infrequent spikes in volatility.
• Separate funds in Universa's so-called Black
  Swan Protection Protocol were up by a range of
  65 to 115 in October.

4
Returns are actually Alphas From
Fama-French 3-Factor RegressionsQ What are the
raw average and std. deviations of those returns,
or the Sharpe Ratios??