�Deeper OTM Puts are considered as �most expensive� options�: What Does This Really Mean?

In my post �Volatility Smile and Volatility Skew � Part 1�, it is mentioned as follows:For Put options, the Implied Volatility is typically the highest for deep OTM options and then is decreasing as it moves towards ITM options.In other words, generally the �most expensive� options are deep ITM Calls and deep OTM Puts.For Put options, the possible reason why people are willing to buy an �expensive� deep OTM Puts are that they are viewed as a form of �insurance� against market crash. The lower cost in terms of dollar might also offer another reason for deep OTM Puts to serve as an insurance / protection tool of one�s portfolio.As discussed earlier in this link, an option is deemed cheap or expensive not based on the absolute dollar value of the option, but instead based on its IV.When the IV...

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Volatility Smile and Volatility Skew � Part 5: Strike Skew vs. Time Skew

Go Back to Part 4: Volatility Smile and Skew ImplicationsStrike Skew vs. Time SkewActually, there are 2 types of volatility skews: Strike Skew and Time Skew.1) Strike Skew, or sometimes called Vertical Skew, is obtained by plotting Implied Volatility of an option with the same expiration month across various strike prices.This is the most common type of Volatility Skew.The volatility skew that has been discussed so far in the previous posts is Strike Skew.2) Time Skew, or sometimes called Horizontal Skew, is obtained by plotting Implied Volatility of an option with the same strike price across various expiration months.This kind of volatility skew might be seen as an indicative of market�s future expectations on a stock.Generally speaking, it is possible for options with any expiration month...

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Volatility Smile and Volatility Skew � Part 4: Implications

Go Back to Part 3: Why Volatility Smile and Skew Happen.Implications of Volatility SmilesIn some cases, volatility charts of an option may shift over time from Volatility Skew to Volatility Smile, or vice versa.When volatility charts of a particular stock�s options show a shift from Volatility Skew to Volatility Smile, this may signal an increased speculators� interest into that stock, implying a possibility of volatile price movements for that stock due to certain reasons. (Please refer to Part 3 for more explanation).For an options trader, this might offer some trading opportunities in order to take advantage of the potential volatile price movement. For instance, by buying straddle or strangle.In addition, with the same logic, when an option of a stock displays Volatility Smiles, this stock...

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