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If in an Option Chain,

1) Average Put IVs are 4-5% more than average Call IVs

2) IV of Put Options, in general, is more than IV of equidistant Call Options (For eg . - For a stock @ 100 spot price, IV of 90 strike Put is more than that of 110 strike Call)

3) Extrinsic value of Put Options, in general, is more than that of equidistant Call Options (For eg . - For a stock @ 100 spot price, extrinsic value of 90 strike Put is more than that of 110 strike Call)

Does all this indicates bearishness in the underlying?

CCCC
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2 Answers2

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Does all this indicates bearishness in the underlying?

Not necessarily. It could indicate that the stock is difficult to borrow. Typically a market maker selling the puts would sell some stock to hedge his position. To sell the stock (short) he will have to borrow it. If it is not readily available, the borrowing cost would be higher. This in turn would be reflected in a higher price for put options, resulting in an higher IV.

xirt
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Normally, for equidistant options, call time premium will exceed put time premium due to the carry cost of long stock in a conversion.

  • If there is a pending ex-div date put premium will increase, relative to call premium.

  • If it's a hard to borrow stock, put premium increases relative to call premium.

Suppose put IV is indeed higher. Is this bearish? How do you know if:

  • It's a bearish buyer of OTM puts?

  • It's a bullish buyer of those OTM puts who sold a bullish credit vertical spread?

  • It's a hedged bullish position where the trader bought the OTM puts to hedge long stock?

AFAIC, Volatility Smirk tells you nothing.

Bob Baerker
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