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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?

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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.

  • Thanks! Never thought that this could also be sth happening with the Stock Options affecting their pricing significantly. In this case, however the Option Chain is of an Index as the underlying. Excuse me for not mentioning it in the original question . I didn't know the reason for Puts being more expensive could be Stock and Index Option specific. Another fact to be added is that the Put-Call ratio is 0.53. – user83683 Jun 14 at 17:13
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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.

  • Even I thought in terms of - What if the Puts are being bought by someone as a part of Bull Put Credit Spread and hence, is in fact Bullish on the underlying. But then, wouldn't a bullish sentiment in the market will result in Call buying as well which would take away any significant gap between the extrinsic value of equidistant options? – user83683 Jun 14 at 16:56
  • Would like to add 2 new facts here, 1) The Option Chain I am referring to here, has an Index as the underlying. Excuse me for not mentioning it in the original ques as I was unaware that some imp reasons for Puts being more expensive than equidistant Calls could be specific to Stock options only. 2) Put-Call ratio is 0.53 – user83683 Jun 14 at 17:02
  • You might pose your questions on the Elite Trader Option BB. While it used to be quite active, in recent years it has nearly died off but there are some professional traders and former option market makers who drop in occasionally. They can provide more detailed explanations. – Bob Baerker Jun 14 at 17:33
  • Thanks for suggesting this forum! I found some really good discussions there.. – user83683 Jun 15 at 12:07

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