Implied Volatility Eases – Seasonal Factors and Jobs Data Weigh

Equity index implied volatility fell during the week as seasonal factors weighed, equity markets rose, and as the nonfarm payroll catalyst passed with 227,000 new jobs created in November vs. a consensus estimate of 211,000.

Option prices tend to fall during the year-end period and that is the case this year as VOLI made a new 52-week low of 9.57on Friday.

VolDex on the S&P 500 (ticker VOLI) fell by another 5.62% during the week to close at 9.59, a 52-week closing low. That is the 1st percentile of the previous 52 week’s daily closing values.

Much of this volatility regime is due to the holiday calendar which generally depresses implied volatility. However, there is also very little fear of a major pullback in equity prices.

TailDex on the S&P 500 (ticker TDEX) fell by another 6.82% to close at 11.98. You can see the 52-week price action for TDEX in Chart 4.

WHY IT MATTERS…while it is easy and accurate to blame the calendar for the decrease in option prices, this price action indicates investors are both optimistic regarding equity prices and unconcerned by potential problems, whether political or geopolitical, for the next 30 days.

CallDex, PutDex, and RiskDex on the S&P 500 Skew, as measured by RiskDex, declined markedly from last week’s closing value of 2.70 to 2.32, a decline of 13.94%.

RiskDex is now well below its historic average of 3.81 (back to 2005). As you can see in Chart 5, any decline below 1.85 should be viewed as an opportunity to use a collar strategy (short a covered call and long a protective put) against a long position in the S&P or a call spread collar to (short a call spread and long a put) to get short exposure to the S&P at attractive prices.

Skew as measured by RiskDex can be used as a measure of fear and optimism and can often be more intuitive than a single measure of implied volatility. As you can see from Chart 6, CallDex is rallying from its recent low of 15.88 made on 11/27/2024, bucking the general trend in option prices.

WHY IT MATTERS…nervous investors are likely selling stock and buying calls as a replacement while traders, who seem to outnumber nervous investors right now, want defined-risk upside as the S&P continues to rally.

This means any moderate pullback in equity prices is likely to be seen as a buying opportunity. 

S&P 500 VolDex Term Structure

Term structure of the VolDex measure of ATM implied volatility steepened slightly during the week as you can see in Chart 7.

WHY IT MATTERS…investors are displaying very little fear for disappointing market action over the next 30 days. Again, this means that traders are likely to view any moderate pullback as a buying opportunity. However, the longer term outlook is less sanguine.

The S&P 360- Day VolDex rose by 1.06% on the week to close at 15.04. This is still historically low as you can see from Chart 8. 90-Day VolDex also rose slightly. The slight uptick in longer-dated option prices beyond 30 days is noteworthy.

VolDex on the Nasdaq-100

VolDex on the Nasdaq-100 fell by 5.45% during the week as the index gained 691.89 points and rose on 4 of 5 trading days. Friday’s close for Nasdaq-100 VolDex is at the 1st percentile of the past 52 weeks.

While the index has occasionally dipped below 15.00 in the past year (as you can see in Chart 10), any declines below that level have been both minor and brief.

The current Nasdaq-100 VolDex regime should be viewed in the context of the calendar.

CallDex, PutDex, and RiskDex on Nasdaq100

RiskDex on the Nasdaq-100 fell from 2.26 to 1.93 to finish the week as OTM put buying from hedgers eased in the face of subdued fear and as OTM call buying spiked among traders seeking long exposure.

VolDex on the Russell 2000 fell by 11.90% during the past week to close at 18.99.

That is the 13th percentile of the past 52 weeks so Russell 2000 option prices have not fallen to new lows like those for the S&P 500 and Nasdaq-100.

It’s also important to note that RiskDex for the Russell 2000 with its weekly close of just 1.14 shows that OTM put and call options are trading near parity.

VolDex on treasury bonds fell 10.35% for the week, as you can see in Chart 15, as the catalyst of the Nonfarm Payrolls passed with a slightly better-than-expected reading.

SpikeDex, an important measure of deep OTM call option prices for those assets that tend to display gaps upward, such as gold, treasury bonds, and crude oil, fell 17.71% in treasury bonds, again due to the catalyst passing and subdued fears for geopolitical turmoil.

Treasury Bond RiskDex closed at 1.01 indicated OTM calls and puts are trading at parity.

WHY IT MATTERS…Treasury bond option prices often display call skew meaning call prices are higher than put prices. This is common in assets that tend to jump higher (treasury bonds, gold, crude oil) rather than jump lower (equity indexes) so this Treasury Bond RiskDex regime is another indication that investors do not expect any unpleasant surprises during the next 30 calendar days.

You can see the Treasury Bond RiskDex in Chart 16 and Treasury Bond CallDex and PutDex in Chart 17.

Note that both CallDex and PutDex are declining to levels near 52-week lows (25.64 and 27.45 respectively). VolDex on gold fell only slightly with VolDex closing at 13.56. You can see the price action in gold VolDex in Chart 18. SpikeDex and CallDex also decreased as implied volatility and fear for increased moves in the price of gold declined.

It is common for gold OTM calls to be more expensive than OTM puts (CallDex greater than PutDex and RiskDex below 1.00) because gold tends to jump higher in the face of expected shocks (as discussed above regarding treasury bonds).

However, you can see in Chart 19 that gold CallDex (in blue) is slightly lower than gold PutDex (in red) meaning RiskDex is slightly below 1.00 (it closed on Friday at 0.96), but this is within the normal range.

What is really striking is the divergence between deep OTM calls and puts in gold. You can see gold SpikeDex in green and gold TailDex in brown in Chart 20. This is very unusual.

WHY IT MATTERS…the 52-week average of the ratio of TailDex to SpikeDex (TailDex divided by SpikeDex) is 0.68 but it closed on Friday at 1.52 so deep OTM put prices are higher than those for deep OTM calls by 223% of the 52-week average.

Traders see much more relative downside than potential upside to gold for the next 30 days. This may be due to traders’ beliefs that the enormous rally in Bitcoin is likely to pull demand from gold.

Given the potential for geopolitical and geoeconomic turmoil this seems to be a trade opportunity that is unlikely to be profitable since these deep OTM calls are 3 standard deviations out of the money but might be very profitable in the unlikely scenario gold spikes due to some catalyst.

VolDex on Bitcoin is new with the advent of spot Bitcoin ETFs such as IBIT which is the underlying used for Nations Bitcoin volatility and option cost measures.

This Bitcoin option market is not fully mature so not all measures are available. Bitcoin VolDex is extremely high relative to other asset classes, commensurate with the realized volatility and potential for volatility in Bitcoin. RiskDex is well below 1.00 so Bitcoin options are displaying significant call skew or significantly more implied upside than implied downside.