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New member Russell Gold is an investment research analyst. Russell Gold fields of interest include technical analysis, macroeconomics, demographics, financial history and energy policy. His published topics include; stock options, dividend investing, technology, services, finance and search... More
  • SLV Undervalued Or Overvalued?  3 comments
    Jul 23, 2012 8:34 PM | about stocks: SLV

    The chart for iShares Silver Trust SLV is near a one year low. However, a low stock price does not always suggest a stock is "undervalued" or "overvalued".

    (click to enlarge)SLV one year chart

    Different from a stock traders evaluations based on technicals or fundamentals, option traders compare relationships between historic and implied volatility to determine whether a stock is "overvalued" or "undervalued". There are different types of volatility, but options traders tend to focus on historical and implied volatilities IV. Historical volatility HV is the annualized standard deviation of past stock price movements. Traders use HV measures to frequently compare the charts of implied volatility to determine if options prices and stock prices are over or undervalued. Below is a one year chart of SLV 30 day HV average, IV index call and IV index put.

    (click to enlarge)

    As you can see, SLV is nearing an IV index mean one year low, implying at least front end (expiring July-August-September) put and call options are undervalued. For option traders and stock traders it can be an advantage to trade equities with low IV in a period of market uncertainty.

    For instance, options traders can tactically position a long strangle. For a trader trading the low IV for SLV he or she would purchase near-the-money front end calls and puts. Stock traders can also take advantage of a low IV for SLV by hedging their investment with undervalued put options, or if the investor is short, he or she can hedge with call options. Below is a comparison of option prices for SLV put and call option calendars expiring January 18, 2013 and September 21, 2012.

    Eod SLV

    (click to enlarge)SLV options calender

    (click to enlarge)SLV Sept Calls Puts

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (3)
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  • greghaarmon
    , contributor
    Comments (3) | Send Message
     
    I never really understood stock options. Thank you Russell GOLD for breaking down how IV works.
    30 Jul 2012, 12:01 PM Reply Like
  • Russell Gold
    , contributor
    Comments (250) | Send Message
     
    Author’s reply » No problem Greg

     

    I'll try to post some future article on a "how to" applying IV and HV to underlying stocks, ETFs, ETNs, options.
    31 Jul 2012, 09:49 AM Reply Like
  • Russell Gold
    , contributor
    Comments (250) | Send Message
     
    Author’s reply » : Apple Stock Dividend, Last Call http://seekingalpha.com​article/​787261-apple...
    8 Aug 2012, 08:33 AM Reply Like
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