Your Week’s Volatility Market Commentary — Make Information Your Edge

The Weekly Takeaway:

• The S&P 500 lost 0.63% this week. It is now up 16.08% for the year;
• The Nasdaq-100 lost 1.93% this week. The index is now up 19.91% for the year;
• S&P 500 VolDex (ticker VOLI) closed at 12.72, an increase of just 0.52% for the week and it is at just the 7th percentile of its 52-week range;
• S&P 500 TailDex (ticker TDEX) closed at 13.89, a gain of 12.47% for the week, completely reversing the previous week’s loss. Nonetheless, it is at just the 14th percentile of its 52-week range. Important historical metrics for all our indexes including average, median, and critical percentile closes are available to subscribers at NationsIndexes.com;
• In the S&P 500, 30-Day VolDex, PutDex, and CallDex are all below the 10th percentile of their 52-week ranges;
• VolDex on the Nasdaq-100 rose by 4.13% to close at 17.95. That is the 11th percentile of its 52-week range despite significant concern regarding the short-term path for AI stocks;
• Nasdaq-100 CallDex fell by 10.65% to close at just 23.01;
• TailDex on the Nasdaq-100 rose by 12.83% to close at 13.53. You can learn more about TailDex at Learn More About TailDex;
• In both the S&P 500 and Nasdaq-100, every index with the exception of CallDex was higher on the week suggesting traders are worried about stock prices over the next 30 days despite the looming holiday;
• The yield on Treasury notes rose by another 5.5 basis points after gaining 12 basis points in the previous week. This week’s closing yield was 4.194%. Despite this, Treasury Bond VolDex fell another 2.42% and closed at just the 5th percentile of its 52-week range;
• Bitcoin gained slightly on the week and Bitcoin VolDex fell by 9.17% to close at 43.71;
• VolDex was higher for nearly all the equity names we cover. VolDex on GOOGL, META, and WMT fell slightly. VolDex on AVGO fell by 15.26% after the company reported earnings;
• The Nations Indexes Optimism Index® fell by 6.85% to close at 79.02 which still expresses substantial optimism. Our Optimism Index is always available in real-time on our home page at NationsIndexes.com;
• You can always learn more about all our indexes at Learn More About Our Indexes;

Equity Index Volatility:

The S&P 500 lost 0.63% this week thanks to a loss of 1.07% on Friday.

Every one of our S&P 500 volatility metrics was higher on the week with the exception of both CallDex tenors. On result was a 27.33% increase in RiskDex as it rallied back above the import level of 4.00 to close at 4.05. This signals substantial concern on the part of hedgers who are willing to bid up out-of-the-money put prices for protection while selling out-of-the-money call prices as prospects for a rally in the S&P 500 over the next 30 days fade.

You can see details for the entire S&P 500 option skew below in our Option Window®.

You can learn more about RiskDex here.

Historical metrics (Average, median, 10th percentile, 25th percentile, 75th percentile, and 90th percentile) for all out indexes are available to subscribers at NationsIndexes.com.

Why It Matters…Historical data for all our indexes is available to subscribers at the Everything! level and they allow option traders to understand the context of the current option pricing environment – the current environment, while not unique, is unusual. Volatility is mean-reverting and that is a phenomenon traders can take advantage of in both directions. But you have to understand what normal is, what the “mean” is, in order to do so.

Nasdaq-100 VolDex rose by 4.13% to close at 17.95.

Last week we pointed out that

“It is interesting that in the Nasdaq-100 7-Day metrics, CallDex, PutDex, and RiskDex all gained on the week. These bear watching.”

That proved to be prescient. This week, every 7-Day volatility metric in the Nasdaq-100 rose including 7-Day CallDex. A lower CallDex number in a weak market likely means traders are selling out-of-the-money call options to get short exposure to the market. When CallDex rallies in a weak market it can mean traders are hungry to buy volatility as cheaply as possible. The former is normal. The latter is worrisome.

Why It Matters…Traders have to have the objective data provided by our indexes to trade in a way that doesn’t rely on hunches or guesses.

Nations Option Window®:

Our Option Window® graphic shows the impact of buying and selling of S&P 500 options at each point on the skew. Moneyness as defined by standard deviations from at-the-money is constant. Each tenor is always precisely 30-days to expiration.

Since each point on the horizontal axis is a constant “moneyness” rather than a constant strike price, moves in the underlying S&P 500 should not directly impact the Window. The only impact should be the movement of volatility. You can see a very pronounced desire by traders and investors to own out-of-the-money put options with the deeply out-of-the-money most in demand.

Nations Investor Optimism Index®:

The Investor Optimism Index® fell by 6.85% to close at 79.02 which is still well in the “optimistic” range.

The index takes into account the current levels of S&P 500 VolDex, TailDex, and RiskDex and compares them to their rolling 2-year ranges. It is plotted on a 0 to 100 scale.

Our Optimism Index is now available in real-time on our home page at Nations Optimism Index.

1DTE Options:

S&P 500 1-Day VolDex rose by 34.93 to close at 8.32.

Very short-dated volatility measures which use a variance swap methodology, as 1-day VIX does, inject significant error into the resulting measure because of the way out-of-the-money options trade in the hours before expiration. The VolDex at-the-money methodology is particularly suited for these very short-dated tenors.

Other Asset Volatility:

Treasury Bonds and Notes:

The yield on 10-year Treasury notes rose to 4.194% this week as note prices continued to fall despite the Federal Reserve cutting short-term rates by another 25 basis points.

Volatility metrics for Treasury bonds were mixed again this week as you can see below with VolDex and CallDex falling and put measures like PutDex and TailDex rising. The fact that VolDex fell slightly suggests traders are not overly concerned but are instead setting themselves up with directional trades that benefit from falling bond prices (increasing yields).

Treasury Bond implied volatility remains VERY low. While we have not witnessed a big move in Treasury Bond prices that would make long volatility structures profitable, short volatility structures are to be avoided. Treasury Bond VolDex closed at just the 5th percentile of its 52-week range and CallDex closed at the low of its range.

Why It Matters…We still believe the ability to buy at-the-money Treasury bond options at historically low prices is a unique opportunity given the risks currently present. It can be frustrating for traders to be buying volatility when it is very low and not have it be profitable but it is the disciplined trade.

Bitcoin:

Bitcoin seems to have arrested its decline although this week’s gain of just 0.90% would be fairly described as anemic.

As you can see, the result was Bitcoin VolDex falling by 9.17%.

Equities:

We have expanded the list of single names we cover to include not only the most dynamic stocks in the S&P 500 and the stocks with the highest option volume, but also the largest names in the S&P 500.

VolDex rose on the majority of the names we cover with only VolDex on AVGO falling by more than 10% after the company reported earnings.

Traders were using options to take directional positions with RiskDex gaining more than 10% for AMZN, GOOGL, and META.

You can learn more about RiskDex here.

All our index values are available in real-time to subscribers.

Scott's Weekly Commentary: