Don’t Be Fooled – What Are Option Markets Really Saying?

The Weekly Takeaway:

• The S&P 500 lost 1.60% this week. That is the third straight weekly loss for the S&P 500 and it is now down 3.12% for the year;
• The Nasdaq-100 lost 1.06% this week. It is down 3.44% for the year;
• Crude oil futures gained 8.81% for the week after gaining 35.64% in the previous week. Crude closed at $99.31;
• The war in the Middle East and resulting energy-supply fears remain the central macro risks, overshadowing economic data;
• S&P 500 VolDex (ticker VOLI) was nearly unchanged this week, rising just 1.86% to close at 23.00. That is still well below the high from April’s tariff turmoil (46.01);
• S&P 500 TailDex (ticker TDEX) fell by 30.90% this week after rising 58.13% in the previous week. It closed at 20.75 as traders believe the likelihood of a “tail event” for stocks has ebbed after last week’s spike in TailDex;
• S&P 500 RiskDex fell by 49.12% despite the selloff in the S&P 500 index. RiskDex closed at 7.99 which is still VERY elevated but eased from the nearly unprecedentedly bearish numbers posted last week;
• You can learn more about RiskDex at Learn More About RiskDex;
• While our put metrics for the S&P 500, (30-Day PutDex, TailDex, and RiskDex) all fell this week, they fell from elevated levels. Traders are still concerned about downside exposure and this price action should not be construed as good news;
• VolDex on the Nasdaq-100 fell by 3.71% to close at 26.39;
• Every volatility metric for the Nasdaq-100, with the exception of CallDex, fell on the week. This is an easing of last week’s fear rather than bullishness;
• The yield on Treasury Notes rose by 15.2 basis points after rising 17.1 basis points in the previous week and ended Friday at 4.285%. Fears of higher energy prices fueling wider increases in inflation are weighing on Treasury Bond and Note prices;
• Every 30-day volatility metric for Treasury Bonds with the exception of CallDex rose by at least 17%. Treasury Bond CallDex fell by 7.23% while Treasury Bond PutDex rose by 42.52% and Treasury Bond TailDex rose by 86.58%. This price action in Treasury Bond options signals a very bearish outlook on the part of traders;
• Gold lost 2.97% for the week while silver lost 4.92% but both are falling from very elevated levels;
• Bitcoin futures rallied for the second week in a row, closing at 71,465. Every Bitcoin volatility metric fell on the week with Bitcoin VolDex falling 6.88% to close at 52.18;
• The individual equities we cover were mostly lower this week although 4 names managed to rally (AMD, GOOG, NVDA, and WMT);
• VolDex on the single names we cover was lower with the exceptions of BRKB and JPM;
• The Nations Indexes Optimism Index® rose by 205.92% to close at 58.89. Optimism rebounded as TailDex fell by 30.90% and RiskDex fell by 49.12% on the week. 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 another 1.60% for the week and fell on four of the five days including a loss of 1.52% on Thursday.

This week’s volatility metrics can be misleading as put metrics fell and CallDex rose. These are reversals of last week’s extreme moves rather than easing of concerns about the direction of the S&P 500 for the next 30 days.

The action in CallDex is interesting as we’ve been pointing out that out-of-the-money call options had gotten extremely cheap (CallDex closed at just 7.13 on March 6th). It appears that CallDex rallied for two reasons: investors realize that owning calls rather than stocks is a sensible approach to a bullish thesis and traders are reaching to buy volatility in the cheapest strike prices (in terms of implied volatility). Again, this should not be viewed as an expression of outright bullishness.

S&P 500 RiskDex fell by 49.12% to close at 7.99 but that is after a rally of 180.36% during the previous four weeks. The average close since inception (1/31/2005) is 3.77 and the median close is 3.43 so current levels remain elevated and pessimistic.

Historical metrics (Average, median, 10th percentile, 25th percentile, 75th percentile, and 90th percentile) for all our 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. You have to understand what normal is in order to do so.

Nasdaq-100 VolDex fell by 3.71% but that follows an increase of 27.64% in the previous week.

Nasdaq-100 VolDex is at the 36th percentile of its 52-week range.

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

Nasdaq-100 RiskDex fell with most other Nasdaq-100 metrics but remains high at 6.78. The long-term (to 1/2/2014) average is 3.16 and the long-term median is 3.04.

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® rose by 205.92% to close at 58.89.

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 traders selling puts, particularly deep out-of-the-money puts which spiked in panicked buying last week, and buying calls for the reasons discussed above. This week’s action was a response to the extreme levels reached last week rather than an expression of bullishness.

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 (other days of the week are in black and gray), was inverted with shorter-dated VolDex measures higher than longer-dated VolDex measures. Normally the term structure curve is upward sloping from left to right but pessimism is keeping shorter-dated volatility higher.

1DTE Options:

S&P 500 1-Day VolDex fell by 23.04% after more than doubling in the previous week. The S&P 500 remains focused on breaking news so traders who are long very short-dated options are able to take advantage of those swings.

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 continue to rally from depressed levels with the exception of Treasury Bond CallDex which fell 7.23% to 31.56.

The price action in Treasury Bonds continues to surprise as inflation fears overwhelm any “flight to quality” buying. Bond futures have dropped 4.17% since the war began and Treasury Bond CallDex has dropped as well.

Treasury Bond VolDex closed at the 34th percentile of its 52-week range.

Bitcoin:

Bitcoin rose by 4.70% and managed to hold the 70,000 level.

Bitcoin TailDex fell by another 19.36% as last month’s fears of a meltdown in Bitcoin prices continue to fade.

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

Precious Metals:

Gold gave up 2.97% this week and silver fell 4.92% but both are coming down from elevated levels. Both were hurt by the lack of “flight to quality” buying witnessed in Treasury Bonds.

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.

Most of the names we cover fell along with the broad market.

VolDex trended lower for most names as last week’s fear abated.

The price action in JPM is noteworthy. Shares lost 2.09% for the week and are now down 12.04% for the year. Last year’s warning of higher expenses and new concerns about creditworthiness are weighing. JPM volatility was mixed this week.

But both VolDex and RiskDex for JPM have been trending higher. JPM next reports earnings on April 14 so 30-day measures are starting to capture that catalyst. We’ll be watching these volatility metrics for insight into earnings for JPM.

You can learn more about RiskDex here.

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

Scott's Weekly Commentary: