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Investing Specialists

Summer Doldrums

Morningstar Volatility Report for Aug. 20, 2010.

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Introduction
The Morningstar approach to options is focused on using company and economic fundamentals to interpret and estimate the value of the uncertainty around market prices, as reflected in implied volatility in the options market.

Government Data So-So at Best, but Corporations Hanging in There
As is typical at the tail end of earnings season and a few weeks before the Labor Day break, trading volumes were again light this week. A big drop in the market toward the end of the week drove up volatility levels at the time, but the VIX Index of market uncertainty still ended the week lower than its previous weekly close.

A dearth of important economic news early in the week contrasted with various news stories across the corporate landscape. A congressional report on Monday saying that repayments of loans made to for-profit education companies such as  Strayer Education (STRA) and  Corinthian Colleges (COCO) were below the 35% level. Education stocks (with the exception of Morningstar Option Portfolio holding  Apollo Group (APOL)) sold off strongly as investors worried that the government would impose expensive oversight measures to for-profit operators or refuse to offer subsidized loans to students of these institutions. On the other hand, news that  Dell  (DELL) had agreed to acquire  3Par  (PAR) at a hefty premium was touted as a reason for some optimism.

Erik Kobayashi-Solomon does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.