OPTIONSMART MORNING UPDATE: Retreated on profit-taking

1. OUTLOOK. The market seems to be questioning whether the increases are based on true fundamentals. In the same time, Wal-Mart announced on Thursday that it beat Q3 earnings estimates. Intel and Advanced Micro Devices announced an agreement to end all legal arguments between the companies. HP said late Wednesday that it was buying networking company 3Com. The technical chart indicates some weakness in the short term. However, QQQQ implied volatility remains low as bullish sentiment still prevails. 

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2. OUR "FEAR GAUGE":  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.

Thursday, the NASDAQ implied volatility closed at 23 and above its 52-week lows. Bullish sentiment still prevails.  

4.  WISDOM NUGGETS: Bulls live above 200-day moving averages, bears live below and try to eat up all rally attempts.

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