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+Chapter 29: Introduction to Index Option Products and Futures 517 
+Due to a phenomenon known as volatility skewing, it is possible for index 
+options to have implied volatilities that are out of line with projected index or stock 
+price movements. This phenomenon is discussed in detail in the chapter on advanced 
+concepts. 
+For example, suppose that index puts are expensive, as they became after the 
+1987 stock market crash. When this happens it may actually be more profitable for a 
+trader who is bearish on the market to buy a package of equity puts instead of buy­
+ing index puts. The equity puts are forced to reflect the probability of stock price 
+movement because arbitrage strategies will keep them in line. They will therefore be 
+less expensive than index puts when this type of volatility skewing is present. Index 
+puts can remain expensive for several reasons - primarily excessive demand and 
+inflated margin requirements. In such situations, it is theoretically correct to buy a 
+group of puts on stock options. In fact, one might even hedge this purchase by sell­
+ing out-of-the money, overpriced index puts. 
+SELLING INDEX OPTIONS 
+In earlier chapters, we saw that many mathematically attractive strategies involve the 
+sale of naked options - ratio writes, straddles, ratio spreads, etc. Index options pres­
+ent an even stronger case for these strategies. Recall that the greatest risk in these 
+strategies with naked options is that the underlying security might move a great dis­
+tance, thereby exposing the position to great loss if the movement is in the direction 
+in which the naked options lie. That is, if one is naked calls and the underlying secu­
+rity rises dramatically, perhaps on a takeover bid, then large losses - potentially 
+unlimited in the absence of follow-up action - could occur. 
+The strategist would, of course, never let the loss run uncontrolled. He would 
+attempt to take some follow-up action to limit the loss or to neutralize the position. 
+However, even the best strategist cannot hedge his position if the movement in the 
+underlying occurs while the market is closed. For example, if the underlying securi­
+ty is a stock, certain news items might cause a large gap to occur between the closing 
+price of a stock and its next opening price. Such news might be related to a takeover 
+of the company or to a drastically negative earnings report, for example. 
+Index options do not have this particular drawback. An index - especially a 
+broad-based index - is not as likely to open on a wide gap as a stock is. An index can­
+not be the subject of a takeover attempt. It cannot be severely depressed by bad earn­
+ings on one of its components. Thus, index options are more viable candidates for 
+strategies involving naked option writing than stock options are. Index futures and 
+options may often open on small gaps of a point or so, due to emotion or possibly due 
+to the fact that a market that opens earlier (T-Bond futures, for example) has already