Option skew during periods of "irrational exuberance"

[MathAndLogic]

The dotcom bubble before it burst was described as period of irrational exuberance by Greenspan. I was in school then. Can anyone please comment on the option skew during that time? I imagine the skew would be to the up side.

Thanks.

 

[jwcapital]

Quote from MathAndLogic:

The dotcom bubble before it burst was described as period of irrational exuberance by Greenspan. I was in school then. Can anyone please comment on the option skew during that time? I imagine the skew would be to the up side.

Thanks.

Sure. Call options were greatly overpriced. I wrote covered calls right up until the decline. I was getting between 30-40% return on these--and this was with margin. Interestingly, I would have done better buying the stock outright and using trailing stops to exit. Great example: I did a covered call on QCOM when it was at 200. The 200 call was about 60. So, I bought 200 shares of QCOM and sold 2 calls. I made $12,000.00. Of course, if I just held the stock and exit with trailing stops, I would have made about $120,000.00 when the stock took off to 800.00 I was a newbie, and I was comfortable with covered calls. As the top approached the value of the call's premiums began to shrink. This was a sign that the ride was ending.

 

[xflat2186]

In 1998 and 1999 I was a market maker in the DELL options pit. The skew still favored the puts as it should have. The great thing was the huge bulk of the retail order flow was people buynig calls and selling puts. Of course this was fantastic for the market makers as we bot puts / sold calls and bot stock all the way up, over and over. Retail people would foolishly pay for calls and sell puts too cheap.