Your Week’s Volatility Market Commentary — Information Is Your Edge
S&P Erodes To End A Strong 2-Year Streak
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Equity Index Volatility
Weekly Takeaway:
- S&P 500 finished 2024 with a gain of 23.31%. This capped the S&P 500’s best two-year stretch in a quarter-century
- For the week, the S&P lost 0.48% and it lost ground on the first 3 days of the holiday-shortened 4 day week
- VOLI gained 4.87% to close at 13.14 for the week
- TailDex (ticker TDEX) fell by 15.86% to close at 10.32 for the week despite the week’s loss
- Divergence between at-the-money volatility described by VOLI and deep out-of-the-money puts as described by TDEX is largely a function of TDEX continuing to revert to the mean following the spike to 38.43 on December 18. This divergence also indicates a lack of concern about a “tail event” in the near future
- VolDex on the Nasdaq-100 rose by 6.22% to close the week at 18.01
- VolDex on the individual names we cover was generally higher with VolDex on AAPL, GOOG, MSFT, and META all climbing more than 10%
- Interestingly, VolDex on TSLA fell by 0.59% despite TSLA being the worst performer in the S&P at one point on Thursday thanks to disappointing Q4 deliveries. This shows the power of the volatility crush following important catalysts
- The Investor Optimism Index rose 25.72% to a still bearish 40.73
Figure 1
Equity Index Volatility:
The week started poorly with the S&P losing ground on the first three days of the shortened week. The S&P lost 1.07% on Monday but this was a moral victory given that it was down 1.70%, more than 100 points, that morning.
This day illustrated the recent divergence between VOLI and TDEX with VOLI gaining 11.71% and TDEX losing 5.98%. This is why we say you have to deconstruct skew to understand what the market is really saying—in this case it was saying that investors were worried (hence the buying in at-the-money options) but not terrified of a “tail event.” This theme continued during the week and is instructive.
Figure 2
The S&P tried to redeem itself with a nice rally to finish the week. The index gained 1.26% on the day as VOLI fell 11.63% and TDEX fell 13.18%. CallDex gained 21.46% indicating there is still substantial interest in out-of-the-money calls as a levered, defined-risk way to speculate on a continuation in the rally. PutDex fell by 1.14% echoing the price action in TailDex which high-lights the lack of interest in buying out-of-the-money puts.
Table 1
Why It Matters… Investors were feeling more confident during the week despite disappointing price action Monday through Thursday. Thus, they were willing to sell out-of-the-money put op-tions. RiskDex, which is the ratio of PutDex to CallDex fell back below 4.00 which reinforces the idea that investors are less fearful.
Figure 3
Nations Investor Optimism Index
Figure 4
Investor optimism rose 25.72% to close at 40.73. Any reading below 50 is pessimistic. The in-crease was due to those out-of-the-money S&P put option prices falling across the board. The index is still a long way from 2024’s high closing level of 94.20 (May 15th).
Why It Matters…Our Optimism Index can be used as a contrarian indicator for BOTH equity prices and option prices.
Deconstructing S&P Skew
It’s important to deconstruct S&P option skew to understand what the option market is really saying and that is particularly true this week given the divergence between at-the-money op-tions, which gained on the week, and out-of-the-money puts, which fell.
If VIX falls because at-the-money options are falling then that explains one market dynamic; if it is falling because out-of-the money puts are falling that explains another dynamic; and if it is falling because out-of-the-money calls are falling that describes a very different market dynamic.
Below you can see the weekly change in constant 30-day to expiration normalized option prices 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 strike prices above the level that is approximately 0.75 standard deviations below at-the-money were higher on the week.
Figure 5
NASDAQ 100 & Russell 2000 Volatility Picture
Other Equity Indexes
Other equity index options showed price action similar to that for the S&P with important differences. In the Nasdaq-100, option prices generally fell with TailDex falling 23.67% after last week’s decline of 23.52% but CallDex rose by 7.12%.
The price action in TSLA was concerning this week and if the Nasdaq-100’s biggest names disappoint during earnings season then look for investors to unload these biggest names first.
Table 2
The decline in Nasdaq-100 RiskDex also describes a “Risk On” outlook for technology names.
WHY IT MATTERS…VolDex on the Nasdaq-100 spent much of the week above 19.00 in a worrisome sign but it managed to close at just the 20th percentile of the 52-week range. At-the-money options can still be considered relatively inexpensive.
Figure 6
Table 3
Other Asset Volatility
Treasury Bonds
VolDex on treasury bonds
VolDex on treasury bonds fell by 6.16% after gaining 7.59% last week and gaining 9.12% in the week prior to that.
At Friday’s closing level of 14.57, VolDex on treasury bonds is at just the 36th percentile for the past 52 weeks meaning option prices are still relatively low although we would not consider them cheap at these levels. Absent looming catalysts, we’re unlikely to consider anything above the 33rd percentile to be cheap.
All our 30-day measures for treasury bonds fell on the week. This was due in part to a small decline in yields which had been flirting with new 52-week highs.
Figure 7
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 market now estimates a 35% chance of a single 25 bps rate cut in 2025 and a 31% change of two. One month ago the market was much more optimistic regarding rate cutting in 2025. This week’s decline across the entire skew of treasury bond option prices offers opportuni-ties for those expecting treasury bond prices to become more volatile if changes in Washington D.C. lead to unexpected news.
Table 4
Bitcoin
VolDex on Bitcoin
VolDex on bitcoin closed at “just” 55.45 on Friday, a decline of 7.58% for the week. While bitcoin prices have been very volatile this year, VolDex had been in a narrow range of 58.89 to 63.26 since bitcoin ETFs was launched in early December. Friday’s closing price is a breakout to the downside for bitcoin option prices. That said, they remain extremely high.
Table 5
0DTE and 1DTE Options
Zero day-to-expiration (ODTE) options continued to dominate the trade in SPY with 57.90% of all the SPY options traded last week being 0DTE. 0DTE volume spiked on Friday, as the S&P rallied, and ended up accounting for 60.12% of all SPY option volume that day. 1-Day S&P 500 VolDex closed the week at 8.12, down 13.42% after being down 17.60% during the previous week.
Equities
TSLA fell by 4.92% for the week to close at $410.44. It is now 15.20% below the 52-week high made on December 17. However, it is still significantly above the $275 level which was the high of TSLA’s range in 2024 until election day. Every TSLA option price metric fell for the week, despite the decline in share price, because the delivery data was released and that potential cata-lyst had passed. Note VolDex on TSLA since the middle of July.
Figure 8
More importantly for shareholders worried about the slide continuing, TSLA PutDex closed at 158.36 which is very high versus other equity names but which is “reasonably” priced given its recent historical range as you can see below.
Figure 9
Concerned investors might buy put spreads for protection. For example, on the close on Friday, in the February 7 expiry, one could have purchased the 350/400 put spread at 17.73. That’s 36% of the width of the spread which is reasonable since the 400 strike is very close to at-the-money. This is not a recommendation but an illustration of a hedge one might implement.
Table 6
Option prices in AAPL highlight the week’s tendency for out-of-the-money put prices to decline with VolDex rising 21.87% but TailDex falling 16.26%.
Figure 10
Table 7
WHY IT MATTERS…We know tail events are more common than the standard distribution of returns would suggest and we know tail events, particularly in the broad market, have an out-size impact on long-term investment returns. But, unfortunately, we also know constantly own-ing deep out-of-the money puts loses money over time. So using hedges tactically is the way to go. That means you have to understand the price history of these trades over time and we’re happy to provide that information.
Scott’s Weekly Commentary
Last week’s tendency for at-the-money options to climb in value while puts fell in value might seem comforting to bulls, particularly when we note that SPY TailDex prices are now in just the 11th percentile of their 52-week range. That’s likely too low given that TailDex’s 30-day tenor captures most of the coming earnings season.
Friday’s rally in the S&P was impressive given the horrible tone of the first 3 trading days of the week. Investors can be heartened by that. But remember that TSLA reports earnings on January 22. NVDA doesn’t report until February 19 and AVGO (Broadcom) doesn’t report until March 6, but if earnings for the names that report over the next two weeks disappoint, the S&P’s current PE ratio of 24.68 (per the Wall Street Journal) is going to be a problem for stock prices.
I’m not bearish, but there is plenty of reason for concern. An optimist would say that if the market can rally like it has with all the potential problems, that’s a reason to expect more upside.
Everyone at Nations Indexes hopes you have a great and profitable week!
Scott