OPTIONSMART MORNING UPDATE: Sunday Edition

1. OUTLOOK: Stocks slumped on worries that the White House's bank plan and China's lending curbs will mean a broader cutback in lending. Questions also arose over whether Fed Chairman Ben Bernanke's term will be renewed. Better-than-expected earnings from Google and Advanced Micro Devices were met with selling pressure. Volatility surged for the second straight session. This is an emotional reaction to the news. By next week, as people have processed it more, we'll see stocks recovering.  Apple, Microsoft, Amazon and Yahoo earnings reports are due next week.

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2. FEAR METER: QQQQ implied volatility rose to 24.6 to as large traders were buying protective puts. 

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. It is a reflection of fear and greed amongst a wide group of market professionals. It’s not wise to ignore this parameter.

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