Get Asymmetrical in 2012
By STEVEN M. SEARS | MORE ARTICLES BY AUTHOR
Learn to look at the stock market through the options market.
Options are arguably the most sensitive instruments for divining the future of stocks. The smartest stock investors dominate the options market. When they are afraid a stock may fall, they buy puts. When they think a stock will rise, they buy calls. Implied volatility, which reveals their expectations of the future, shows if they expect the stock move sharply, or not.
By dividing an option’s implied volatility by 16 — the square root of the number of trading days in a year — stock investors can get a sense of a stock’s expected movement that is priced into the put or call. The “Rule of 16,” as the exercise is known, will give you a good estimate of the options market’s views.