1. Volatile markets exhibit greater skewing in out-of-the-money options.


2. Calls almost always have a greater increase in the “skewing effect” than puts. It is our view that this occurs because of small traders demand for call options in bullish markets. Most traders prefer to be “long a market” rather than short based on the psychological assumption that a market can move to infinity and an unlimited amount of money can be made; while prices can only drop to zero thereby “limiting” potential profits. Not a very logical argument, but understanding of this provides important clues to the option trader who is looking for volatility differences. The precious metals and grains, particularly silver and soybeans, tend to exhibit the most dramatic effects of option skewing in bullish situations.


3. Option volatility is normally somewhat higher in the “front month” of an option series. This effect is exaggerated as the market approaches expiration and in volatile market situations.


4. The S&P 500 options exhibit some of the best circumstances for option skewing, however, they do no follow any of the above rules. In the S&P 500 we find:

• Volatility decreases on calls as they move out-of-the money while they increase for puts.


• Volatility for puts often range 50% to 100% higher than for calls.


• Just like volatility increases in bullish markets in the grains, volatility increases in bearish markets in the S&P 500, from volatility lows of 10-11% to over ten times that level.


• The furthest out-of-the-money puts have the greatest disparity in values.