Option Markets Were Looking Bearish but Iran News Will Dominate

The Weekly Takeaway:

• The United States and Israel launched coordinated attacks on Iran early on Saturday morning. This analysis relies on market data from the close on Friday; readers should recognize these attacks will dominate the market action on Monday morning;
• The S&P 500 lost 0.44% this week. It is now up 0.49% for the year;
• The Nasdaq-100 lost 0.21% this week. It is now down 1.15% for the year;
• Stocks were hurt on Friday when producer price information for January was released and showed that prices increased more than expected. This followed last week’s higher than expected PCE inflation data;
• S&P 500 VolDex (ticker VOLI) rose by 1.64% this week and closed at 16.11. Friday’s close is the 17th percentile of the 52-week range;
• S&P 500 TailDex (ticker TDEX) rose by 3.99% and closed at 19.01. That is the 28th percentile of its 52-week range;
• S&P 500 RiskDex rose by 18.69% after rising 11.55% in the previous week and closed this week at 9.06. That is the absolute top of its 52-week range and describes very strong conviction among traders that the S&P 500 is more likely to fall than rally over the next 30 days;
• You can learn more about RiskDex at Learn More About RiskDex;
• VolDex on the Nasdaq-100 fell slightly, losing 0.65% to close at 21.47;
• RiskDex on the Nasdaq-100 rose by 8.22% after gaining 20.27% in the previous week and closed at 6.64. That is another 52-week closing high and the highest level since September 2021;
• The yield on Treasury Notes fell by 12.4 basis points on the week as investors fled equities and sought the safe haven of Treasuries, bidding up those prices. Treasury Bond VolDex rose by 5.13% to close at 11.02. Treasury bond volatility showed a decided bullish stance with CallDex also rising as PutDex and TailDex fell;
• Bitcoin futures lost another 2.85% this week. Bitcoin volatility as measured by VolDex continued to hover around 50;
• The individual equities we cover were mixed this week with “old economy” names like BRKB, LLY, and WMT gaining and GOOG, MSFT, NVDA, TSLA, META, and AVGO all falling by more than 1% (NVDA was the worst performer with a loss of 6.65% for the week after reporting earnings);
• VolDex on the single names we cover was mostly higher. NVDA VolDex fell slightly following the chipmaker’s earnings report;
• The Nations Indexes Optimism Index^® fell by 13.87% to close at 47.74. Optimism fell as all three inputs, VolDex, RiskDex, and TailDex rose on the week. That is the first close below 50 in several weeks. 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 0.44% on the week and lost ground on Monday (-1.04%), Thursday (-0.54%), and Friday (-0.43%).

VolDex on the S&P 500 rose but CallDex fell 13.29% after falling 13.03% in the previous week. This week’s CallDex close of 8.82 is the bottom of the 52-week range and the lowest close since September 2021. CallDex on the S&P 500, Nasdaq-100, and Russell 2000 are ALL at the bottom of their respective 52-week ranges. You have to go back to September 2021 to find a lower close for Nasdaq-100 CallDex and back to August 2023 to find a lower close for the Russell 2000 CallDex.

S&P 500 RiskDex gained 18.69% after gaining 11.55% and 29.08% in the previous two weeks respectively. This week’s close of 9.06 is an extreme level for RiskDex and while it might be comforting to think the market is largely hedged against a sharp decline, it is likely that many investors are not yet hedged. These unhedged investors are likely to be quick to sell in the event of a downdraft. We’ll be watching the price action in equity index futures when they open on Sunday evening.

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

This is the 5-year chart for S&P 500 RiskDex.

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 fell by 0.65% this week. This was largely in response to the passing of the NVDA earnings catalyst.

Nasdaq-100 VolDex is at just the 21st percentile of its 52-week range.

Nasdaq-100 RiskDex rallied 8.22%.

While RiskDex signals that out-of-the-money put options are extremely expensive in relation to out-of-the-money call options, VolDex remains reasonably priced in the Nasdaq-100 meaning traders who wanted to hedge using at-the-money puts could still do so on Friday.

You can learn more about VolDex at Learn More About VolDex.

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 Investor Optimism Index®:

The Investor Optimism Index^® fell by 13.87% and closed at 47.74. Any reading below 50 signals more pessimism than optimism.

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.

Option Window:

Option Window fills in the blanks between TailDex, PutDex, VolDex, and CallDex and reveals how trade flows were driving option prices. This week you can see buying of a broad range of strike prices from 0.5 standard deviations above at-the-money (approximately 7020 in the S&P 500) downward but selling of deeper out-of-the-money calls.

Term Structure:

The Nations TermDex^® measure of VolDex term structure illustrates S&P 500 VolDex for various tenors. It provides insight into both near-term and longer-term expectations for volatility in the S&P 500.

Friday’s closing term structure, in red, displayed a relatively normal shape in that it was upward sloping. 15-Day VolDex is slightly higher than 7-Day VolDex because it catches the next CPI (March 10) and PPI (March 12) data that 7-Day VolDex will not catch.

1DTE Options:

S&P 500 1-Day VolDex rose by 27.74% for the week.

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:

Treasury Bond volatility metrics displayed a strong “flight to quality” bias this week with traders reaching to buy out-of-the-money calls as reflected in CallDex, and selling puts.

Investors tend to buy Treasuries when they leave the stock market and Treasury options are signaling more may be ahead. Given this week’s hotter than expected inflation data it is difficult to assign any other thesis to the decline in yields.

Treasury Bond VolDex closed at the 13th percentile of its 52-week range so these options are still reasonably priced for traders seeking to establish directional positions. Treasury Bond CallDex is at just the 36th percentile of its 52-week range but that is not likely to be the case on Monday.

Last week we noted that Treasury Bond VolDex was low, and “Any dip below 10.00 should be considered an opportunity to buy volatility.” Traders got that opportunity for much of the day on Thursday and those who took advantage will be well rewarded on Monday.

Bitcoin:

Bitcoin fell another 2.85% and closed below 66,000 on Friday. Bitcoin volatility was higher in all 30-day metrics with the exception of CallDex which signals that option traders continue to be bearish on Bitcoin.

Bitcoin TailDex rose by 1.60% after rising 13.14% in the previous week as traders recognize that extreme moves in Bitcoin remain likely.

You can learn more about TailDex at Learn More About TailDex.

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.

Technology and AI-related names had a tough week with investors unimpressed with NVDA earnings and outlook. As noted above, “old economy” names did well.

The most recent earnings release cycle is completed and the news was generally good with blended year-over-year EPS growth reaching 13.2% which was better than expected when the cycle started. Nonetheless, concerns about the impact of AI leave the S&P up just 0.49% for the year and the Nasdaq-100 down 1.15%.

VolDex was mostly higher for the names we cover and gained more than 5% on the week for AAPL, JPM, and LLY.

RiskDex rose for most names and closed above 1.24 for all names. TSLA RiskDex rose by 0.68% as option traders continue to shun out-of-the-money calls for out-of-the-money puts in TSLA.

The jump in JPM RiskDex is striking and might signal new concerns about financials. While JPM RiskDex reached 3.58 in April, that was in the middle of the tariff turmoil. JPM RiskDex closed on Friday at 2.44, the 52nd percentile of its 52-week range.

AAPL RiskDex gained 15.37% for the week and closed at 2.32, the 72nd percentile of its 52-week range, signaling substantial concern regarding direction for the iPhone maker over the next 30 days.

You can learn more about RiskDex here.

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

Scott's Weekly Commentary: