Implied Volatility Rises Slightly From Lows

VOLI ended this week at 10.31, an increase of 7.5% despite putting both CPI and PPI behind us. CPI came in as expected on Wednesday with a monthly increase of 0.3%, matching the consensus estimates and this fostered a rally in the S&P 500 of 0.82%.

Interestingly, when PPI came in on Thursday with an increase of 0.4%, versus consensus estimates of just 0.2% to 0.3%, the S&P gave back only 0.54%. The S&P fell on 4 of the 5 trading days but lost only 0.64% for the week.

The slight uptick in VOLI (7.5%) on the week should be chalked up to last week’s VERY low closing level of 9.59 (any reading below 10.00 should be considered very low).

VolDex on the S&P 500 (ticker VOLI) rose by 7.52% during the week to close at 10.31, the 4th 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 considerable confidence the Fed is going
to help investors end the year on a strong note by cutting rates at their meeting which ends on the 18th. (See Chart 2).

TailDex on the S&P 500 (ticker TDEX) rose by 13.22% to close at 13.56. It is interesting that TDEX has not dropped back below 10.00 since the volatility spike in August. 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 depressed option prices, this price action in TailDex indicates investors remember the sell off in August and are willing to pay up slightly for protection against a tail event even as they push down VOLI and other ATM option prices.

We’ll learn a great deal about attitudes by watching TDEX in the immediate aftermath of the Fed meeting.

S&P 500 VolDex Term Structure

CallDex, PutDex, and RiskDex on the S&P

500 Skew, as measured by RiskDex, rebounded from last week’s closing level of just 2.31 to close at 2.77, an increase of 19.97%. While that is a substantial jump, RiskDex is still well below the average closing value of 3.81 from inception to the end of 2023.

This week’s rally in RiskDex was a function of both PutDex increasing by 16.92% and CallDex falling slightly.

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, the rally in CallDex from its recent low of 15.88 made on 11/27/2024, has petered out a bit.

WHY IT MATTERS… investors are continuing to buy calls to get defined-risk exposure to the upside but this has eased a bit. This bullishness means any moderate pullback in equity prices is likely to remain a buying opportunity.

S&P 500 VolDex Term Structure:

Term structure of the VolDex measure of ATM implied volatility was little changed during the week and showed very little range as you can see in Chart 7.

WHY IT MATTERS… investors are displaying very little fear for disappointing market action in the short term. 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 3.43% after gaining 1.06% last week and it closed at 15.55 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 rose by 6.16% during the week as the index gained 158.00 points.

Friday’s close for Nasdaq-100 VolDex
is at the 4th percentile of the past 52 weeks so it is still very low. The Nasdaq-100 index has outperformed all the other major indexes this year, gaining 29.44% YTD vs. the S&P 500, which is up 26.86%.

Artificial intelligence names have dominated, helping the Nasdaq-100. For example, Broadcom gained 24.4% on Friday, was the best performer in the S&P, and its market capitalization climbed above the magical $1 trillion level, thanks to great earnings results and pristine guidance.

CallDex, PutDex, and RiskDex on Nasdaq 100

RiskDex on the Nasdaq-100 rose to 2.09, an increase of 7.76% to finish the week as both OTM calls and OTM puts increased in value with puts gaining more, likely on buying from hedgers who want to protect gains.

VolDex on the Russell 2000 rose by 3.74% to end the week at 19.70. That is the 16th 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.

While the Russell 2000 has posted a respectable rally of 15.78% YTD, that is about half that of the Nasdaq-100. The difference in VolDex among these 3 indexes is striking. You can see this in Chart 1.

It’s also important to note that RiskDex for the Russell 2000, with its weekly close of just 1.15, shows that OTM put and call options are trading near parity.

WHY IT MATTERS… sophisticated traders can look at relative value trades in S&P options versus Russell 2000 options.

VolDex on treasury bonds rose by 11.76% for the week, as you can see in Chart 16, as the 10 -year yield jumped on both Thursday and Friday and reached its highest level in a month.

Despite this increase, option prices for TLT are still low with VolDex in the lower-third of its 52-week range.

Both CallDex and PutDex on TLT gained on the week (14.43% and 23.98% respectively) but as with VolDex, these are rallying from very low levels as you can see in Chart 17.

WHY IT MATTERS… 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 believes there is a 41% chance the Fed will cut rates by 

at least 75 basis point by the end of June. This week’s inflation data certainly doesn’t call for aggressive easing, nor does the jobs picture with the most recent unemployment rate at just 4.2%.

Defined-risk trades that profit from an increase in treasury bond realized volatility seem to be a good use of risk capital for the next 6 months.

Treasury Bond SpikeDex, an important measure of deep OTM call option prices, fell 33.57% this week after falling 17.71% in the previous week while TailDex rose 14.09% this week as traders threw in the towel on deep OTM calls and started to worry about treasury bond downside. This is an important gauge of market sentiment for treasury bonds.

Treasury Bond RiskDex rose by 8.34% indicated OTM puts are gaining on OTM calls.

WHY IT MATTERS… Treasury bond option prices often display call skew (OTM call prices are higher than OTM put prices). This is common in assets that jump higher (treasury bonds, gold, crude oil) so RiskDex is an indication investors are worrying about bond prices falling. Owning slightly longer dated (e.g., 90-day) TLT put spreads is a way to express this thesis.

VolDex on gold rose slightly, closing at 14.00 as you can see in Chart 19. SpikeDex, PutDex, and CallDex also increased.

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 the table above that OTM gold calls are only slightly more expensive that OTM gold puts.

We’re watching the jump in both SpikeDex and TailDex in gold and the continued divergence between deep OTM calls and puts. You can see gold SpikeDex in green and gold TailDex in brown in Chart 21.

This price action is very unusual.

WHY IT MATTERS… the 52-week average of the ratio of TailDex to SpikeDex (TailDex divided by SpikeDex) in gold is 0.68 but it closed on Friday at 1.10 so deep OTM put prices are higher than those for deep OTM calls.

Traders see much more relative downside than potential upside to gold for the next 30 days.

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.

Bitcoin VolDex is extremely high relative to other asset classes, commensurate with the potential for volatility in bitcoin prices, but it closed the week at 58.89, a decline of 4.64%.

CallDex fell by 12.09% but PutDex rose slightly. RiskDex at 0.81 is well below 1.00 so Bitcoin options are displaying significant call skew or significantly more implied upside than implied downside.

Interestingly, while that RiskDex value seems very low, and it is, there are 2 names among the 10 largest in the S&P with lower RiskDex readings: Tesla at 0.64 and Alphabet (Google) at 0.76. We’ll leave it to you to determine if that says more about bitcoin, Tesla, Alphabet, or the equity market in general.

WHY IT MATTERS… It would be easy to look at the Dexes for bitcoin and think options are very expensive, and they are with both CallDex and PutDex well above 100, but the relationship between the two describes an environment where a trader could use them in concert to create a trade structure that suits their thesis.

A reminder, we would never suggest a naked call position in bitcoin and we would suggest a naked put position only if it was cash-secured and the trader was willing and able to take delivery if the price fell.

But trading a put spread (long or short) versus a call spread (short or long) would be a very low cost yet defined risk way to express a point of view about bitcoin’s direction.