Schaeffer's Trading Floor Blog
Stocks quoted in this article:

Chris says - "Nick, As someone just starting out in options I find this very disquieting. That said, it fits in perfectly with the home study course. Could you please expand on Mike's point about using volatilities and theoretical value to "get a better idea of premiums and what you're paying" - perhaps with an example? Many thanks, Chris "

My response - In case you missed it last week, I have begun to start covering the Advanced Home Study Program. As far as the topic of volatilities, I want to start with a quick crash course and then revisit the topic a few times.

As we will see later on the in the course, implied volatility is defined as the assumption of a stock's volatility that helps determine an option's price. In contrast, historical volatility is a statistical measure of past behavior.

In other words, implied volatility is "the market's best guess" of what volatility will be going forward while historical volatility shows you what has been the case. In theory, you can plug historical volatility into an option pricing model to calculate the theoretical value of an option which you can then compare to the actual price to find "overvalued" and "undervalued" options. However, I should point out there are flaws in the option pricing models that make this much more difficult to use in the real world but I am getting off topic...

As far as the question above goes, you can find implied volatility along with historical volatility on the Quotes & Tools page under "Implied Volatility". I went to that page and captured this screen shot that shows the data for General Electric (GE).

As the link above shows, implied volatility for at-the-money GE options was 10-to-12 percent. This is roughly inline with the one-month historical volatility of 13 percent and suggests that the options market is not anticipating a quick increase in near-term volatility.

This story would be very different if an event is coming. For example, implied volatilities on (AMZN) were running high above historical volatility last night, ahead of the earnings announcement. Said another way, the options market was anticipating the potential for an increase in volatility due to the earnings.

I think that covers enough ground for now and we will revisit the topic as we move through the study course. If you have questions on Chapter One, please send them in as we are getting ready to move on to Chapter Two.


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Stocks quoted in this article:

Here are today's top and bottom performing Exchange Traded Funds (ETFs)...

Top Performing Sector Exchange Traded Funds:

  • Internet HOLDRS (HHH) = +2.82 percent
  • iShares GS Networking (IGN) = +1.97 percent
  • Pharmaceutical HOLDRS (PPH) = +1.67 percent
  • Telecom HOLDRS (TTH) = +1.38 percent
  • Wireless HOLDRS (WMH) = +1.33 percent
  • Materials Select Sector SPDR (XLB) = +1.10 percent
  • iShares DJ US Telecom (IYZ) = +1.10 percent
  • Health Care Select Sect SPDR (XLV) = +0.96 percent

Bottom Performing Sector Exchange Traded Funds:

  • iShares DJ US Financial Sector (IYF) = -0.05 percent
  • iShares Russell 2000 Index (IWM) = -0.09 percent
  • iShares Lehman 20+ Year Treas Bond (TLT) = -0.21 percent
  • Regional Bank HOLDRS (RKH) = -0.26 percent
  • iShares DJ US Financial Svcs (IYG) = -0.56 percent
  • iShares GS Semiconductor (IGW) = -0.64 percent
  • iShares Nasdaq Biotechnology (IBB) = -0.93 percent
  • Semiconductor HOLDRS (SMH) = -1.17 percent

On the upside we see internet stocks leading as the group is helped by's (AMZN) 15 percent gain on the day...semis and biotech are lagging the action...

Note: If you are not familiar with ETFs, make sure you read the Education and FAQ sections in our ETF center.

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Readers Respond - Housing?

by 7/27/2005 3:07 PM
Stocks quoted in this article:

Steve says - "What's with the home builders lately?"

My response - The housing group has been on fire for quite some time as demonstrated by the charts below...

Created with SuperCharts by Omega Research

The monthly chart shows a steady rally in place since early 2003. The daily chart highlights the recent action which shows a pullback to the 20-day moving average amid a short-term uptrend.

You might also find it interesting to check out the sector scan page that shows the group is one of the highest rated with five stocks earning an overall scorecard reading of 8 or higher...


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Buying Demand Hits the Tape

by 7/27/2005 2:16 PM
Stocks quoted in this article:

I have seen some sporadic spikes in the NYSE net ticks today...but the intensity appears to have picked up in the last few minutes and the broad market indices are now starting to move higher...


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Readers Respond - Morgan?

by 7/27/2005 2:12 PM
Stocks quoted in this article:

Stuart says - "Nick : MWD beginning to look ugly. Dya think there's a trade there?"

My response - A check of the Morgan Stanley (MWD) sentiment and scorecard show mostly neutral readings and don't appear all-too exciting. Here are a couple of charts to add perspective.

Created with SuperCharts by Omega Research

The daily chart shows the shares have recently been in a steady uptrend along the 20-day moving average. Today they are breaking that trendline. However, the long-term view shows a range.

One of the points that jumps out on the monthly chart is the recent February peak (which was lower than the March 2004 peak) and the recent May bottom (which was higher than the July 2004 bottom.) While slight, this narrowing range might hint that "pressure" is building. However, with the shares mid-way between the high and low boundaries and the lack of a strong sentiment read, I don't enough to get a read on which way it may break.


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