Most Major Stock Indices, Like the S&P 500, Exhibit an Implied

Multiple Choice

Most major stock indices, like the S&P 500, exhibit an implied volatility skew. This means if we consider three put options, $P \left( K _ { 1 } \right) , P \left( K _ { 2 } \right) , P \left( K _ { 3 } \right)$ at strikes $K _ { 1 } < K _ { 2 } < K _ { 3 } \leq S$ (where $S$ is the current index level) and the options have implied volatilities $\sigma _ { 1 } , \sigma _ { 2 } , \sigma _ { 3 }$ , respectively, then the most likely pattern is

A) $\sigma _ { 1 } < \sigma _ { 2 } < \sigma _ { 3 }$ .
B) $\sigma _ { 1 } = \sigma _ { 2 } < \sigma _ { 3 }$ .
C) $\sigma _ { 1 } = \sigma _ { 2 } = \sigma _ { 3 }$ .
D) $\sigma _ { 1 } > \sigma _ { 2 } > \sigma _ { 3 }$ .