Question
The following information relates to Questions 5-7 Hannah Mishkin is a junior equity derivatives sales-trader at Smith Securities, LLP. Miskin has noticed a recent surge
The following information relates to Questions 5-7
Hannah Mishkin is a junior equity derivatives sales-trader at Smith Securities, LLP. Miskin has noticed a recent surge of option trading activity on the shares of Tesla. Miskin decides to investigate pricing of Tesla put and call options. As part of her research, Miskin plots Teslas implied 30-day volatility (IV 30) against various put deltas. The put delta represents the moneyness of available options. For example, a put with a delta of .20 is deeply out of the money. Miskin is trying to understand why the IV30 is not the same value for all put deltas. Teslas 30-day implied volatility by put delta for the current date, and a 52-week average is shown below.
5. A possible explanation of why Implied volatility on Teslas out-of-the money (OTM) puts is greater than its at-the-money puts (ATM) is
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There is greater demand for ATM puts on Tesla than on OTM puts
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There is an increasing bullish sentiment on Teslas share price
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There is an increasing bearish sentiment on Teslas share price
6. Based on the chart above, Mishkin is likely to estimate Teslas current at the money (ATM) volatility as closest to
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89%
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50%
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110%
7. A common trading strategy employed to take advantage of an options implied option skew is to buy or sell a so-called risk reversal. If Mishkin believes that Teslas put volatility is too high relative to Teslas call volatility, then she is most likely to
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Sell a risk reversal by buying the OTM put and selling the same expiration OTM call
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Buy a risk reversal by selling the OTM put and buying the same expiration OTM call
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Buy a risk reversal by buying the OTM put and buying the same expiration OTM call
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