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+Chapter 39: Volatility Trading Techniques 
+VOLATILITY SKEWING 
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+After the stock market crashed in 1987, index options experienced what has since 
+proven to be a permanent distortion: Out-of-the-money puts have remained more 
+expensive than out-of-the-money calls. Furthermore, out-of-the-money puts are 
+more expensive than at-the-money puts; out-of-the-money calls are cheaper than at­
+the-money calls. This distorted effect is due to several factors, but it is so deep-seat­
+ed that it has remained through all kinds of up and down markets since then. Other 
+markets, particularly futures markets, have also experienced a long-lasting distortion 
+between the implied volatilities at various strikes. 
+The proper name given to this phenomenon is volatility skewing: the long-last­
+ing effect whereby options at different striking prices trade with differing implied 
+volatilities. It should be noted that the calls and puts at the same strike must trade 
+for the same implied volatility; otherwise, conversion or reversal arbitrage would 
+eliminate the difference. However, there is no true arbitrage between different strik­
+ing prices. Hence, arbitrage cannot eliminate volatility skewing. 
+Example: Volatility skewing exists in OEX index options. Assume the average volatil­
+ity of OEX and its options is 16%. With volatility skewing present, the implied volatil­
+ities at the various striking prices might look like this: 
+OEX: 580 
+Implied Volatility 
+Strike of Both Puts and Calls 
+550 22% 
+560 19% 
+570 17% 
+580 16% 
+590 15% 
+600 14% 
+610 13% 
+In this form of volatility skewing, the out-of-the-money puts are the most 
+expensive options; the out-of-the-money calls are the cheapest. This pattern of 
+implied volatilities is called a reverse volatility skew or, alternatively, a negative 
+volatility skew.