Understanding Investor Sentiment Today - Part Three | Volatility and the VIX

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Understanding Investor Sentiment Today - Part Three

In the previous two sections (Part 1, Part 2) we talked about using the S&P 500 index's implied volatility (A.K.A. the VIX) to decode what investors are thinking about risk, fear, confidence and the trend. Each individual stock with options available has a similar measure derived from its specific levels of implied volatility. This indicator can be extremely useful when trying to manage risk on a current long or short position.

Stock Trading

Implied volatility will normally rise when uncertainty and/or fear is rising towards a particular stock. This will happen frequently before scheduled announcements like earnings or M&A activity. Higher levels of implied volatility will inflate the prices of options on the stock because the market is trying to account for a higher probability of dramatic movement in the near term. When implied volatility breaks out of normal ranges it is a good indication that market participants are expecting changes in the near term. This is a signal for you to cover or hedge the position and a clear awareness can help improve your effectiveness as a risk manager.

In the video I will walk through the implied volatility historical chart on Microsoft (MSFT) over the last year. Once you have reviewed the video, go to the forums and check out where we think the VIX is going from here and get ready to shout out your own opinion.

By the way, you can find some additional tips on options pricing here.

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