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

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Equity Index Volatility

The Weekly Takeaway:

• S&P 500 gained 0.67% for the week but it was a wild, and at times sickening, ride
• S&P 500 was down as much as 1.73% on Friday before closing down just 1.11%
• Highflying technology stocks led the way down on Friday with the Nasdaq-100 losing 1.36%
• TSLA was the worst performer in the S&P for most of Friday and closed down 4.95%
• TSLA is now 10.81% below its recent high, putting it in correction territory. However, it’s still up 73.72% YTD
• Index option prices came back to earth after the previous week’s spike
• S&P 500 VolDex fell 12.41%
• S&P 500 out-of-the-money puts fell even more; PutDex and TailDex fell by 17.88% and 32.33% respectively
• VolDex on the individual names we cover bucked the index trend with VolDex on AAPL gaining 8.58% and VolDex on MSFT gaining 5.11%
• However, TailDex on the individual names we cover fell across the board and fell by as much as 28.38% with 5 of the names seeing TailDex values fall by more than 20% for the week.
• The Investor Optimism Index rose 107.25% to a still-anemic 32.47

Equity Index Volatility: The week started well—a holiday was looming for everyone and the S&P 500 was on the “Nice” list, gaining a tidy 1.84% during the first two days of the week.  Then the Grinch or Scrooge or something else naughty showed up and cut the week’s gain to just 0.67% with a loss of 1.11% on Friday.

It was a day which at times was all about “Look Out Below!” but the S&P managed to close down just 66.75, 37.89 above its low which had it down by more than 100 points during the middle of the day.

There was nowhere to hide on Friday as every sector in the S&P 500 lost ground and the stocks that had been the year’s guiding lights, tech and AI names, were hit.  NVDA lost 2.06%. TSLA lost 4.95% and was the worst performer in the S&P most of the day.

Even AAPL, which seems more like a consumer products company than a tech company lately, lost more than the broad market, closing down 1.31%.

This week’s equity index volatility action was driven by implied volatility coming back to earth following the big spike last week. S&P 500 VolDex closed at 12.50, down 12.41% despite jumping 12.60% on Friday.

The enormous amounts of fear that had been injected into the market last week largely came undone this week with PutDex falling by 17.88% and TailDex falling 32.33% for the week and actually falling by 1.31% on Friday.

TailDex had lagged VolDex all day on Friday but was mostly positive until the Friday Effect kicked in and braver traders still selling those deep out-of-the-money puts.

Why It Matters… Investors were clearly spooked during the previous week as evidenced by huge gains in the price of puts (TailDex up 34.74% and PutDex up 40.92%) and that is easing now and that’s good news for the bulls.

It’s tough to look at TailDex losing ground on Friday, a day the S&P 500 traded down 100 points during the middle of the day and closed down 66.75 points, and not think the previous week’s abject levels of fear have been forgotten.

RiskDex above 4.00 means there is still much more demand for hedging puts than speculative calls but it fell 11.58% for the week in another example of fear evaporating.

Equity prices this week weren’t helped by an increase in interest rates with the 10-year yield gaining 9.5 basis points and many talking about it revisiting the 52-week high of 4.737%.

It is possible for investors to shrug off the drop in tech stocks given the huge gains they’ve enjoyed this year with the Nasdaq-100 still up 27.62% YTD and names like NVDA and AVGO (Broadcom) up 176.66% and 116.57% YTD respectively.

Nations Investor Optimism Index

Investor optimism more than doubled but it was rising from VERY low levels and finished the week at just 32.47. Any reading below 50 is pessimistic. The increase was due to S&P option prices falling across the board.

The index is still a long way from 2024’s high closing level of 94.20 (May 15th). The S&P fell slightly over the next 10 trading days following that May high in optimism but more importantly, option prices rose substantially over those next 10 days with VolDex gaining 9.36%, RiskDex gaining 45.53%, and TailDex gaining 48.44%.

Why It Matters… Our Optimism Index can be used as a contrarian indicator for BOTH equity prices (in this instance it wasn’t very contrarian) and option prices (in this instance it was very contrarian).

Deconstructing S&P Skew It’s important to deconstruct S&P option skew to understand what the option market is really saying. 

If VIX rises because at-the-money options are rising then that explains one market dynamic; if it is rising because deep-out-of-the money puts are rising that explains another dynamic; and if it is rising because of out-of-the-money calls that describes a very different market dynamic.

Here you can see the weekly change in constant 30-day to expiration options by their distance out-of-the-money. Fear was clearly leaving the market but deep out-of-the-money puts (on the far left) were down the most on a percentage basis and call options more than 1 standard deviation from at-the-money were higher on the week.

These calls can provide levered, defined risk, upside exposure. Regardless, it’s vital to know where the selling and buying pressure is focused to understand what the market is really trying to tell you.

NASDAQ 100 & Russell 2000 Volatility Picture

Other Equity Indexes

Other equity index options showed price action similar to that for the S&P. In the Nasdaq-100, option prices generally fell with TailDex falling 23.52% but CallDex rose by 1.28%. Again, out-of-the-money call buyers appeared and they were even more aggressive than in the S&P.

WHY IT MATTERS… While VolDex on the Nasdaq-100 has increased since the very low level 3 weeks ago (13.46 on December 6th), it is still reasonably priced thanks to the continued bullish tenor of tech and AI markets. Its close on Friday puts it in the 15th percentile of the 852-week range.

Traders can use at-the-money QQQ options to express a point of view while at these levels and investors can place hedges to protect very generous gains. Many investors don’t want to take profits before the end of the year (for tax reasons) but we wonder if they won’t be happy to do so in January so owning 30-day hedges can make sense as they’re cheap.

Other Asset Volatility

Treasury Bonds

VolDex on treasury bonds

VolDex on treasury bonds rose by another 7.59% for the week after gaining 9.12% last week.

Even at Friday’s closing level of 15.53, VolDex on treasury bonds is at just the 45th percentile for the past 52 weeks meaning option prices are still relatively low although we would not consider them cheap at these levels.

Investors worried about rising yields (which would push bond prices lower) can still take advantage of reasonably priced hedges. PutDex on treasury bonds fell slightly on the week.

Speculators can also take advantage. RiskDex fell by 11.43% on the week as call option prices rose and put option prices fell. Owners of TLT (the underlying for our treasury bond indexes) can take advantage by establish option collars to protect downside by foregoing some potential upside.

RiskDex at 1.09 shows out -of-the-money calls and out-of-the-money puts are trading nearly at parity with puts slightly more expensive (RiskDex greater than 1.00 means puts are more expensive than calls, below 1.00 means calls are more expensive than puts).

WHY IT MATTERS… As we have been saying for some time, treasury bond prices are likely to become very volatile if the market begins to rethink its optimistic outlook for rates in the first half of 2025.

The most interesting change in option prices this past week took place in gold where option prices fell in all our measures. The decline in TailDex is most striking but TailDex is not historically cheap, it’s simply returning to a more normal value. Some would say it is “reverting to the mean.”

Bitcoin

VolDex on Bitcoin

VolDex on bitcoin closed at 60.00 last Friday, a decline of 2.23% for the week. While bitcoin prices have been very volatile this year, VolDex has been in a narrow range of 58.89 to 63.26 since bitcoin ETFs was launched in early December.

0DTE and 1DTE Options

Zero days to expiration (ODTE) options continued to dominate the trade in SPY with 55.22% of all the SPY options traded last week being 0DTE. 0DTE volume bucked the trend on Friday by accounting for 58.01% of all SPY volume despite the ugly price action in the S&P 500. Normally, 0DTE volume plummets when equity markets do but Friday was an exception. We don’t believe there is any significance to Friday’s volume but we’ll continue to watch 0DTE volume for guidance. 1-Day S&P 500 VolDex closed the week at 9.38, down 17.60%.

Equities

TSLA fell by 4.95% on Friday and spent much of the day as the worst performer in the S&P 500. Note VolDex on TSLA since the middle of July. Despite Friday’s price action, the stock is up 29.67% for the past month as Elon remains a darling of the market.

TSLA VolDex and CallDex rose slightly as you can see but put prices fell with TailDex dropping 23.69% as fear evaporated.

Option prices in NVDA fell across the board during the past week with only RiskDex showing any green only because call prices fell slightly more than put prices.

NVDA shares have seemed to defy gravity this year with the stock up 176.66% YTD. Congratulations if you’ve owned shares this year. Note VolDex in NVDA relatively low (just the 18th percentile of the 52- week range).

WHY IT MATTERS… It is a rare opportunity to be able to construct defined-risk option trades in a name as volatile as NVDA and do it relatively cheaply—we say relatively because NVDA VolDex is lower than VolDex for just two of the other individual names we cover (AMD and TSLA).

So NVDA options aren’t cheap but they’re in the lower quintile of the 52-week range. Regardless of your stance on NVDA, VolDex indicates that it might make sense to use at-themoney options to express your point of view.

Scott’s Weekly Commentary

It would have been understandable to expect a quiet week last week with so many people away for the holidays. But there was enough movement and volatility to satisfy everyone.

The coming week offers the same possibility. The fact that market leading technology and AI stocks were the worst performers on Friday might seem scary but it is customary for those names to lead the way lower as we’ve discussed in the past.

And Friday’s 4.95% loss in TSLA could seem particularly ominous until you recall it’s up 29.67% over the past month and 73.72% YTD.

What will I be paying attention to for the next 30 days? Earnings!

If market leaders can managed to once again post really good earnings then we’ll continue running higher. Selling that has been pushed into 2025 for tax reasons may be an occasional problem but that will be overcome if earnings, and more importantly guidance, remain very strong.

One dynamic to watch for in the tech and AI space: some of the second-tier names are struggling to keep up. ORCL and ADBE recently disappointed and their stock suffered for it.

ORCL is up 60.26% YTD on AI’s coattails but it’s flat for the past 3 months and is down 7.52% for the past month. ADBE is even worse off despite trying to climb onto AI’s coattails.

The stock is down 25.16% YTD and 13.08% for the past month. The price action will be ugly for names that aren’t able to climb on the AI bandwagon and are instead seen as vulnerable to the new technology.

In short, there’s something for everyone, bulls and bears alike. Enjoy! Everyone at Nations Indexes hopes you have a great and profitable week!