CallDex®
A VITAL MEASURE OF THE COST OF OUT-OF-THE-MONEY CALL OPTIONS.
The Nations® CallDex® Index measures the normalized cost of the 30-day to expiration call option that is 1 standard deviation out-of-the-money.
CallDex is the first and only measure of the cost of call options. As such, it is a measure of expectations for a rally in the underlying stock or ETF as well as a general measure of expectations for volatility during the
next 30 days.
Interpreting the Value of CallDex
The value of CallDex increases as the price of the 1 standard deviation out-of-the-money call option with 30 days to expiration increases. Higher call option prices indicate expectations for greater volatility during the next 30 days and a potentially upside bias from speculators and traders. For traders who think in terms of deltas rather than standard deviation: 1 standard deviation out-of-the-money corresponds to a 16 delta.
So CallDex describes the normalized cost of out-of-the-money options prices. What do we mean by “normalized?” You can see below in the CallDex Construction section.
Since CallDex measures option prices, any increase in option prices will increase CallDex and this can sometimes be confusing. If the market is falling because it is under intense pressure, why would call option prices be climbing?
How Is CallDex Constructed?
The Nations CallDex Index measures the normalized cost of a hypothetical call option with precisely 30 days to expiration which is precisely 1 standard deviation out-of-the-money.
CallDex uses current option prices to calculate the 1 standard deviation threshold for the 2 expiration dates bracketing 30 days from today. It then interpolates a hypothetical option price with a time of expiration of precisely 30 days and a strike price precisely equal to this 1 standard deviation out-of-the-money threshold. This option price is then normalized by dividing by the forward price of the stock or ETF.
The best way to understand everything an option market has to say is to deconstruct skew and CallDex provides insight into this vital portion of the option market.
In summary:
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- Uses front- and second-month expirations to calculate exactly 30 days from expiration
- Calculates point that is 1 standard deviation out of the money, then uses the options around that point to calculate a theoretical option exactly at the 1 stddev point
- Normalize the theoretical option by dividing by the price of the SPY ETF
Call Option Basics
A call option gives the owner of the option the right, but not the obligation, to buy the underlying asset at the exercise price, often called the strike price, before the option expires. The buyer of the call option pays a fee for this right; that fee is called the option premium.
Since the owner of the 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 above the strike price of the option on the expiration date the owner of the call option will exercise their right and buy the asset at the strike price.
In exchange for the option premium received, the call option seller is obligated to deliver the asset and accept the strike price as payment if the owner chooses to exercise their option.
Buying a call option is generally a bullish strategy in that the price of the underlying needs to rise for the trade to be profitable. Every option one might buy, even an in-the-money option, will have some time value and the price of the underlying asset much rally enough to account for the time value paid.
You can see the payoff profile for a long option position here:
But before buying or selling a call option, we should have some gauge that can help us understand if a particular call option is historically expensive or cheap.
That’s where CallDex comes in. It provides a consistent, objective measure of the price of out-of-the-money call options that can be compared over time or across assets.
Historical Results
How To Use CallDex
While CallDex measures the cost of options at a specific point of the volatility curve, it can help traders and investors make more informed decisions, manage risk, and identify potential opportunities.
It is the focus that sets CallDex apart from volatility measures that amalgamate all options listed because if some measure like VIX is higher but CallDex is lower then that provides information other traders don’t have.
Key Ways to Use CallDex in Trading
Market Sentiment Gauge
CallDex provides insight into overall market sentiment. As you can see in the historical graph above, CallDex reacts to general changes in volatility; CallDex will rally when fear and uncertainty increase because traders will reach to buy options in order to “get long volatility” (they do so by buying call options and selling the underlying so that the position is “delta neutral).
Here you can see important metrics regarding the history of S&P CallDex although we calculate CallDex 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 CallDex to be high when it’s above the 75th percentile. We would consider it to be very high when it is above the 90th percentile level. If VolDex is also very high then sentiment is poor and the market is worried about direction. Traders are likely bidding up out-of-the-money call options in order to get long volatility by buying the cheapest options available (they will turn the trade into a volatility trade rather than a bullish directional bet by selling the appropriate amount of SPY an making the trade “delta neutral”).
We would consider CallDex to be low if it is below the 25th percentile value, and we would consider it to be very low if it is below its 10th percentile value.. If CallDex is low we would describe sentiment as moderate. If sentiment were more bullish then traders would likely be buying out-of-the-money call options which would keep CallDex from falling to low levels.
When coupled with VolDex, CallDex can provide more nuanced insight into market sentiment. If VolDex is at an historically moderate level but CallDex is at a level that is relatively higher, that is a signal of positive sentiment.
Lifetime and 52-week metrics are updated daily and those values are available to subscribers.
Timing Option Market Entries and Exits
Since CallDex measures the cost of specific options it can be used as a signal to buy out-of-the-money option or to sell covered calls.
- Traders want to buy call options when they’re historically cheap and the prospects for a rally in the stock are strong.
- Investors might want to replace long stock with long call option positions when call options are cheap and the stock has already rallied strongly.
- Investors want to sell covered calls when calls are expensive and the stock is not likely to rally strongly.
CALLDEX CAN HELP TRADERS AND INVESTORS DO ALL OF THIS MORE EFFECTIVELY
By combining CallDex with a simple moving average, many investors are making better decisions regarding their trading of call options.
For example, if call options are cheap and a stock is below its 50-day moving average, that might be a good time to buy speculative call options.
On the other hand, if you own the stock and call options as measured by CallDex are expensive and the stock is well above the 50-day moving average (or your preferred metric) then selling covered calls is likely to be attractive.
For example, take a look at a recent CallDex chart for high-flyer NVDA. Some investors are probably thinking about buying NVDA given its leading place in selling the AI chips everyone seems to need now. But given that NVDA is already 10% above its 20-day moving average and that call options are cheap (NVDA CallDex is near its 52-week low), it is likely that a defined-risk trade that buys call options rather than shares offers a better risk/return profile.
Timing Underlying Market Entries and Exits
CallDex 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), CallDex can be a great contrarian indicator.
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