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Chapter 9. Stock Selection and the Optio... > Option Volatility to Judge Stocks

Option Volatility to Judge Stocks

Tax rules are certainly a complication in your portfolio. Taxes alone may prevent your entering specific types of transactions. However, knowing the tax outcome in advance provides you with better information and guidelines for proceeding. For most investors, managing market risk—usually measured by degrees of volatility—is a more immediate problem.

Most investors agree that, as a technical indicator, changes in volatility signal changes in risk. High volatility in option premium is a warning sign. Although higher-than-average option premium (caused by implied volatility) is attractive, it also tells you that buying shares of stock is a high-risk idea. It contradicts your conservative risk profile.


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