TailDex®
A VITAL MEASURE OF TAIL RISK AND THE MARKET’S PERCEPTIONS OF THE LIKELIHOOD OF A STEEP DECLINE IN PRICE.
The Nations® TailDex® Index measures the market’s estimate of the likelihood an extreme drop in price.
TailDex is the first and only measure of the market’s perceptions regarding the likelihood of a “Tail Event” which is generally agreed to be a decline in price of at least 3 standard deviations. Nations TailDex indexes are model-free, robust from a theoretical standpoint, and use current option prices to define the 3 standard deviation threshold meaning they’re always relevant and never rely on stale historical data.
Interpreting the Value of TailDex
The Nations TailDex Index calculates and standardizes the cost of options that hedge against a three standard deviation decline in price.
Since TailDex measures the cost of hedging tail risk and standardizes the threshold of a such tail event, a threshold shared by the academic and investment communities, TailDex is superior to other measures of tail risk and can be compared to Nations TailDex Indexes on other equity indexes and asset classes.
Existing measures of tail risk exhibit significant flaws as most focus on the reaction of option implied volatility to an extreme event rather than the market risk of the event. The calculation of the tail event threshold for Nations TailDex is based on the current volatility environment rather than stale historical data.
How Is TailDex Constructed?
The Nations TailDex Index measures the normalized price of the precisely 3 standard deviation out-of-the-money put option that has precisely 30 days to expiration. The moneyness and time to expiration are constant and the index is calculated every 15 seconds.
Financial market returns are not normally distributed; extreme event occur much more frequently than a normal distribution of returns would predict. In the S&P 500, tail events for month returns occur 22-time more frequently than a normal distribution would predict and these extreme events have a substantial impact on long-term investment returns.
TailDex provides insight into the frequency of tail events by quantifying the market’s perceptions of the likelihood of such an event.
In summary:
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- TailDex measures the likelihood of an extreme event;
- It is robust from a theoretical point of view and uses constant moneyness and time to expiration, both of which are adjusted every 15 seconds;
- Offers the only available measure of events that are important to investors.
TailDex Basics
TailDex measures the normalized price of a 3 standard deviation out-of-the-money put option with a constant 30-days to expiration.
A put option gives the owner of the option the right, but not the obligation, to sell the underlying asset at the exercise price, often called the strike price, before the option expires.
The buyer of the put option pays a fee for this right; that fee is called the option premium.
Since the owner of the put option has a right, but not an obligation, options are different from futures because both parties in a futures trade have obligations.
If the price of the underlying asset is below the strike price of the put option at the close of trading on the expiration date the owner of the put option will exercise their right and sell the asset at the strike price.
In exchange for the option premium received, the put option seller is obligated to buy the asset and and pay the strike price as payment if the owner chooses to exercise their option.
Buying a put option is generally a bearish strategy in that the price of the underlying needs to fall for the trade to be profitable.
Since the option’s strike price is 3 standard deviations out-of-the-money these options would be considered “deep out-of-the-money”.
Put options can also be bought by owners of the underlying asset as insurance or protection against the price of the asset falling below the strike price.
Historical Results
How To Use TailDex
TailDex measures the perceptions of the occurrence of an unlikely event. However, this unlikely event, a “Tail Event” is more likely than a normal distribution of investment returns would predict. In fact, a tail event is approximately 22-times more likely than a normal distribution predicts. /p>
This mismatch between perception and reality is what makes TailDex important…tail events are more likely than we would think and they do tremendous damage to investment portfolios.
Key Ways to Use TailDex in Trading
Market Sentiment Gauge
TailDex provides intuitive insight into overall market sentiment with special focus on the sentiment regarding a collapse in price. This often manifests itself only after markets have started to decline so it can provide deeper insight into expectations for the depth of the decline. As you can see in the historical graph above, TailDex reacts to general changes in volatility; Equity market TailDex will rally when fear and uncertainty increase but TailDex will increase in price violently when concern gives way to real fear. When TailDex is high there is a substantial amount of fear. When it is very high the markets are nearing panic.
One other important aspect many traders watch is how quickly TailDex retreats from a spike. In 2025 it has retreated from recent spikes very quickly. Savvy traders are watching how quickly TailDex recovers as another important input to their trade analysis.
Here you can see important metrics regarding the history of S&P TailDex although we calculate TailDex on a wide variety of assets and each will have its own, often very different history (subscribers can access this data, updated on a daily basis, here.
As a sentiment gauge, we would consider TailDex to be high when it’s above the 75th percentile of historic returns. We would consider it to be very high when it is above the 90th percentile of historic returns.
We would consider TailDex to be low if it is below its 25th percentile value, and we would consider it to be very low if it is below its 10th percentile..
When coupled with both VolDex and PutDex, TailDex can provide more nuanced insight into market sentiment and the depth of fear of substantial price declines.
Lifetime and 52-week metrics are updated daily and those values are available to subscribers.
Timing Option Market Entries and Exits
Since TailDex measures not just fear but the depth of fear as well as expectations for direction, it can be a useful indicator. Below you can see the subsequent 21 trading day return for the S&P 500 index when TailDex trades are certain levels.
TAILDEX CAN HELP TRADERS AND INVESTORS DO ALL OF THIS MORE EFFECTIVELY
Timing Underlying Market Entries and Exits
TailDex offer unique insight into the thinking of traders. Because of this it can help in timing underlying market entries and exits.
For example, in the S&P 500 (the underlying asset for all our S&P 500 indexes is SPY, the S&P 500 ETF), TailDex can help time market entry and exit for strategies using deep out-of-the-money puts.
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