OPTIONSMART MORNING UPDATE: Erased early losses

1. OUTLOOK: Strength in commodity-linked shares offset weakness in the retail sector. The rebound in commodity prices boosted shares of energy and materials companies. Needham downgraded Amazon to Hold from Buy on high valuation. Salesforce.com reported in line with estimates and issued upside revelue guidance. Investors will digest reports on consumer prices and initial construction of new homes this morning. QQQQ implied volaitlty inched lower as investors bet on the uptrend. U.S.futures point to a neutral open. 

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2. OUR "FEAR GAUGE":  Monday, the NASDAQ implied volatility fell 4% to 22.14 (see the 5-day chaart below) as investors bet on the uptrend.

About Implied Volatility.  Investor fear and greed play a significant role in financial markets. The question is, how can investors measure market sentiment in an emerging market situation? How can they gauge the fear? Volatility is a well-known measure of risk in financial markets. When volatility is low, there is a lack of fear. High volatility, however, suggests a fearful markets. Volatility can be calculated in two ways. Either from historical stock price data or from current option price data. Using the second method results in an implied volatility measure. This represents a forecast of uncertainty over a specific period of time. The implied volatility on NASDAQ-100 represents the consensus of option traders’ forecasts for the index volatility over the next 30 days. It is a reflection of fear and greed amongst a wide group of market professionals. It’s not wise to ignore this parameter.

4. WISDOM NUGGETS: Think in terms of probabilities and act upon them.There are no certainties in trading. You can keep yourself out of trouble by thinking in terms of probabilities. Get comfortable with approximate predictions and interpretations.

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