OPTIONSMART MORNING UPDATE: Lacking positive catalysts

1. OUTLOOK: Stocks tumbled for the second day in a row as concerns about the economic recovery resurfaced and the outlook for the technology sector darkened. Bank of America downgraded the semiconductor industry. Buyers showed some mild interest late in the session, but the moves were quickly repressed. Intel and AMD both fell more than 3%. After the closing bell, Dell Inc.reported Q3 results that fell short of analysts' expectations. We expect more volatilty today. 

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2. FEAR GAUGE: QQQQ implied volatility jumped to 21.8 (see the 5-day chart below) in early trading on weak economic data and slipped before the closing bell to 20.9 indicating that investors are ready to step in.   

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: Forget the news, remember the chart. The chart already knows the news is coming. 

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