In the lengthy thread regarding "whether markets decline faster than they rise," I did not see any mention of the put/call skew in S&P. It's well documented that, at least since 1987, during most "normal" periods, out-of-the-money puts are rather more expensive than out-of-the-money calls. There are several ways to explain this phenomenon:

1) Markets fall faster than they rise — and options traders know this. Otherwise, arbitraging this difference would be a meal for a lifetime.

2) Market participants perhaps anticipate that the realized volatility during a bear market is greater than a bull market. However, the problem with this analysis is one might expect to see an upward sloping volatility yield curve in out-of-the-money puts (during bull markets), and yet that does not usually occur based on my tests. Conversely, right now have a downward sloping yield curve in out of the money calls — which confirms the hypothesis that market participants anticipate slower price rises in the future. [Note to quants: I am not confusing delta, gamma and vega. I'm using options to predict terminal price at expiration.]

3) For most humans, fear of loss is a stronger emotion/motivator than the pleasure of gain (greed). This is well documented in the psychology and behavioral finance literature. Hence, ceterus paribus, capital market participants (who have a net long position) will, as a group, pull their rip cord faster — to flee from risk — than they will embrace the possibility of profit.

4) Lastly, my tests show that, in certain commodities, the exact opposite behavior to S&P occurs. For example, and perhaps due to the inelasticity of demand for grains, more-often-than-not one sees a call/put skew on the call side. Every so often, after a quiet "normal" period, one does indeed find an upward acceleration in price change correctly predicted by the put/call skew. Once suppy/demand is normalized, the (inevitable) ensuing bear market is much slower. These are generalizations of course, but I've found them to be true over the years. Bottom line: Market participants anticipate that stocks do indeed decline faster than they rise. The options market is priced for this outcome. And if it were not true, you could arbitrage the put/call skew.



"It's not that I disbelieve Northern Rock," customer Anne Burke, 50, said as she waited with her 90-year-old father in a line of 130 people outside the Brighton branch. "But everyone is worried and I don't want to be the last one in the queue. If everyone else does it, it becomes the right thing to do." (Bloomberg News)

This is an interesting example of mob psychology and herd behavior, particularly in light of the following facts:

1) The Bank of England has declared Northern Rock to be solvent, and is providing massive liquidity to meet withdrawals. Additionally, the British FDIC equivalent guarantees deposits up to 31,700 pounds.

2) The credit default swaps on Northern Rock are trading around 170 basis points — rather tighter than several big US broker-dealers.

3) Alliance & Leicester's (the 7th largest bank in the UK) stock price fell about 30% today as the panic spread to a second institution. A company spokesman said that he "knows no reason for the share price fall."

The last time the Bank of England provided "emergency funding" to a bank in these circumstances was 1973 — when the economic landscape was obviously very different.

The Chancellor of the Exchequer just issued the following statement:

"I can announce today … should it be necessary … we with the Bank of England would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability."

It sure isn't 1933 …



 Mr J.G. reports that he has just found the website Cramer Watch, which tracks Cramer's myriad of picks and compares his performance against Leonard the Wonder Monkey (a random coin toss.) So far Leonard the Wonder Monkey is ahead!

Ongoing Stats:
Jim Cramer is right 49.30% of the time.
Jim Cramer's picks average a 0.12% ROI after 30 days.

Leonard the Wonder Monkey is right 50.13% of the time.
Leonard's picks average a 0.34% ROI after 30 days.

Inspired by this, Vic reports that after fifty years of trading we have finally bought a TV for the office in order to track the possible ephemeral effects that characters like Cramer may have on the markets.


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