Let's say you are sitting on rather good performance figures by holding a market portfolio. The market went up for a long time. That's awesome. However, you think the air is getting thinner up there and expect a market correction is around the corner. Maybe there is room for another 10%, but that's it. So, you think to yourself, 'why don't I start selling my holdings potentially 10% above the current level?' To achieve this, you can sell call options at levels above the current market to some unfortunate market maker (dealer) at a big financial institution. If the market does rise another 10%, you will fully participate up to that point and will have generated additional income through the option premium received for selling to the friendly market maker the privilege of participating on the spoils above the unlikely up move.
To add insult to injury, you will ask the poor sap at the same time for a price to protect your portfolio against a market drop and buy some 'crash protection' (e.g., put options). That will show him. With a lot of supply on the upside and increasing demand on the downside, prices for calls will fall and prices for puts will increase. This is what is called an investment skew and you can observe it in every equity options market and sometimes also in a commodities market (this tells you some very interesting things about market conditions but is a story for another column).
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