easy · Frm Part 2 Market Risk
An equity analyst notes that 'crashophobia' has dominated index option pricing since October 1987.
How does this sentiment manifest in the relative pricing of out-of-the-money (OTM) puts versus OTM calls?
- OTM puts trade at significantly higher implied volatilities than OTM calls.
- Both trade at the same implied volatility, reflecting the symmetric nature of risk.
- OTM calls trade at higher implied volatilities because investors are chasing 'lottery' payouts.
- Implied volatility is constant across all strikes, indicating a balanced view of future jumps.
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