Your Week’s Volatility Market Commentary — Information Is Your Edge
Jobs Data, Inflation Fears, Trump Tariffs: Stocks Fall Slightly
The Weekly Takeaway:
- The S&P 500 fell slightly this week, giving up 0.24% as the index fell 0.95% on Friday following December jobs data being revised higher, leading to worries about inflation;
- Stocks extended their losses on Friday when President Trump announced he would announce new reciprocal tariffs next week;
- VolDex (ticker VOLI) fell 2.12% to close at 13.21 marking the 3rd decline in the last 4 weeks. VolDex fell despite the week’s decline in the S&P as the month’s big catalyst, the nonfarm payrolls data, passed relatively uneventfully. However, VolDex closed at just the 19th percentile of the 52-week range despite inflation and tariff fears;
- TailDex (ticker TDEX) rose slightly to close at 12.71 as investors want deep out-of-the-money puts for protection. TailDex closed at the 17th percentile of the 52-week range;
- The Nasdaq-100 rose a tiny 0.06% for the week, bucking the S&P 500. VolDex on Nasdaq-100 fell 3.06% for the week as fears about turmoil in the AI space eased a bit, but the broader volatility picture was more nuanced. In the Nasdaq-100: CallDex collapsed by 16.79%, PutDex rose by 0.63%, and TailDex rose by 14.88%. Traders have given up buying out-of-the-money calls and are now buying puts;
- VolDex on the individual names we cover was universally lower as several reported earnings and general fears regarding a bursting of the AI bubble eased;
- The Investor Optimism Index fell to close at 30.37, a decline of 16.19%.
Figure 1
Equity Index Volatility:
The S&P 500 lost 0.95% on Friday despite an early advance which reversed as investors rethought the implications of upward revisions to December’s data. The concern is that, while more people being employed than initially thought is generally good news, it’s also likely to be slightly inflationary and cause the Fed to rethink further rate cuts. So VolDex fell slightly (2.12%), CallDex fell a more substantial 15.86%, and puts increased in price across the skew with PutDex (the normalized price of the 1 standard deviation out-of-the-money put) increasing 3.05% and TailDex increasing 5.52%. CallDex has now fallen 28.49% since its recent high of 19.77 on January 22nd. It is now in just the 12th percentile of its 52-week range, a strange but notable issue given the S&P 500 is less than 2% below its all-time high.
VolDex on the Nasdaq-100 closed at 18.13, down 3.06% on the week and is now at just the 20th percentile of its 52-week range while PutDex closed at the same 23rd percentile it was at last week. In another striking performance for out-of-the-money call options, CallDex on the Nasdaq-100 fell by 26.63% to close at 23.88, the 7th percentile of its 52-week range.
Call prices in both indexes show very little optimism, an important reversal from previous weeks.
Figure 2
RiskDex (the ratio of PutDex to CallDex) on the Nasdaq-100 closed the week at 2.93, an increase of 0.50 or 20.71% and it is now at the 54th percentile of its 52-week range. RiskDex on the S&P rose by a similar 22.38% and is now at the 45th percentile.
Why It Matters…The decidedly less bullish / more bearish tone in equity index options is worthy of our attention as it may be a harbinger of lowered expectations for the first half of 2025.
In the comparison chart of PutDex and CallDex below you can see how CallDex is falling.
Figure 3
Nations Investor Optimism Index
Investor optimism fell by 16.19% for the week to close at a fairly pessimistic reading of 30.37. Since 2007, the Investor Optimism Index has closed between 30.00 and 40.00 on 12.23% of all trading days and for those days, the subsequent 20-day total return for the S&P 500 has been an anemic 0.29%, the weakest returns for any 10-point range of optimism. The greatest subsequent 20-day return is 2.04% which occurs when the Investor Optimism Index is below 10.00, illustrating the index’s value as a contrarian indicator.
Figure 4
Why It Matters…Our Optimism Index can be used as a contrarian indicator for BOTH equity prices and option prices. Any level below 20 can be considered a contrarian “Buy” signal in the S&P 500 as the average subsequent 20-day total return when the Investor Optimism Index is below 20.00 is 1.49%.
Deconstructing S&P Skew
Last week saw uniform buying of nearly all strikes below at-the-money and we acknowledged this signaled “concern” but not “fear.” This week leaned further in the same direction as all strike prices below the level 0.5 standard deviations below at-the-money (approximately $592.00 in SPY) were bought and the buying interest increased as strike prices fell further below at-the-money. All strikes above that level were sold.
Figure 5
Other Equity Indexes
As we have discussed, the Nasdaq-100 gained slightly (+0.06%) on the week as worries about a DeepSeek led meltdown in AI names eased. However, while VolDex eased, PutDex rose and TailDex climbed 14.88%
.
Table 2
Table 2
Other Asset Volatility
Treasury Bonds
VolDex on Treasury Bonds
Our Dexes on treasury bonds fell across the skew and tenors this week with the exception of a small gain in 30-day VolDex (+2.47%). The declines are attributed to the nonfarm payrolls catalyst passing as it is particularly impactful on bond prices.
That at-the-money option prices (VolDex) rose slightly while out-of-the-money option prices fell suggests bond option traders want to be long volatility without having to make a directional bet.
Figure 7
Treasury bond VolDex closed the week at the 38th percentile of its 52-week range with CallDex and PutDex similarly priced at 38th percentile and 41st percentile respectively. Smart investors will continue to use our indexes to monitor the contradictory volatility regimes displayed by equity indexes and treasury bonds.
It is also worth noting that with Treasury Bond RiskDex closing the week at 0.95, out-of-the-money calls remain slightly more expensive than out-of-the-money puts but the two remain near parity. RiskDex is likely to climb if expectations for fewer rate cuts spread and it is likely to fall if traders buy calls in the expectation for a steep drop in equity prices and subsequent “flight to quality” buying in treasuries.
Why It Matters…Treasury bond option prices are generally the purview of institutional traders so they can be used as a gauge of expectations for movement in both treasury bond prices and eq-uity index levels as we’ve described above.
Table 4
Bitcoin
VolDex on Bitcoin
VolDex on bitcoin rose slightly on the week, reversing a series of declines. Defined-risk positions which are short volatility in bitcoin continue to make sense.
Table 5
Table 5
0DTE and 1DTE Options
Zero day to expiration (ODTE) options continued to account for the majority of SPY option volume, with 56.68% of this week’s SPY option trading being 0DTE. Wednesday saw 60.36% of all SPY option volume in that day’s expiry.
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 op-tions trade in the hours before expiration. The VolDex at-the-money methodology is particularly suited for these very short-dated tenors.
Figure 8
Equities
This week’s news was bad for many of the individual equities we follow with GOOG losing 8.98%, AMD losing another 7.24% (now 52.68% below its 52-week high), and TSLA los-ing 10.62%. NVDA reversed the previous week’s DeepSeek led decline with a gain of 8.14%.
All names we cover have released Q4 earnings with the exception of NVDA which is due to re-port on February 26th.
This most recent batch of earnings and guidance did little to shed light on the impact of AI spending on future earnings as AMD issued disappointing guidance because of slowing sales to data centers while GOOG stunned investors by predicting it will spend $75 billion on AI focused capital expenditures when the market expected a number that was $15 billion lower. So AMD fell because there’s not enough spending on AI and GOOG fell because they’re spending more than expected on AI.
Figure 9
The across-the-board declines in VolDex on these individual names shows the power of the vol-atility crush following catalysts like earnings and jobs data, particularly in our 7-day tenor.
AI will eventually do wonderful things but getting to that point will generate volatility among the most noteworthy names. That provides an opportunity for option traders with objective data.
Last week we pointed out that VolDex on NVDA closed the week at the 75th percentile of its 52-week range. That eased considerably this week and is now at the 52nd percentile as DeepSeek fears eased and shares rebounded.
This displays the value of objective data vs. intuition or assumptions as defined-risk positions that were short volatility generally paid off.
TSLA is also interesting following the week’s 10.62% decline in share price.
TSLA’s RiskDex has consistently been the most bullish, meaning it’s been lowest, among the names we cover and it continues to display call skew meaning TSLA options display more im-plied upside than implied downside. You can see that changed slightly this week and the in-crease in TSLA’s TailDex (+43.92) is noteworthy.
Defined-risk bearish positions, such as a call spread collar (selling a call spread and using the proceeds to buy a put) can be done at reasonable levels given this level of call skew. For those who are long shares and desire a hedge, this call skew could be put to work in the March 7th expiry by selling the 400 strike covered call (we would never suggest selling a naked call) for 7.65 at the close on Friday and using the proceeds to pay 7.20 for the 330 strike put.
This structure collects a small amount of net premium (0.45 assuming these prices) while that call strike is 10.61% away from Friday’s closing price of $361.62 and at the same time the put strike is only 8.74% away from TSLA’s closing price. Betting against Elon, or selling call options to truncate upside in TSLA, hasn’t worked very well for the past decade but that doesn’t mean investors can’t use logical option structures tactically.
Scott’s Weekly Commentary
This week’s uncertainty regarding tariffs took its toll on the mar-ket, particularly when President Trump mentioned on Friday that new retaliatory tariffs and tar-iffs beyond Canada, Mexico, and China are discussed. The market hates uncertainty which makes it surprising that option prices in the S&P are still relatively low (VolDex at just the 19th percentile).
Friday’s price action in the S&P (higher initially before selling off as traders rethought the impli-cations of a stronger labor market) will be seen as disappointing, and it is in the context of the decline accelerating thanks to the renewed talk about tariffs, but to the degree the weakness was a result of expectations for fewer rate cuts because of more employment, it’s good news for the economy and ultimately for our stock market and should be viewed as such. This is one of those goofy moments when good news (i.e., upward revisions to the jobs picture from Decem-ber) is bad news for the stock market.
I’ve always thought the economic data was inconsistent with the amount of easing the market expected, or hoped for, from the Federal Reserve. Inflation is well above the Fed’s 2.00% tar-get (about 2.80% right now). The unemployment rate is well below the Fed’s 5.0% target (4.0% as of Friday with the participation rate ticking up). And economic growth came in at a decent if not sparkling 2.3% during Q4 of 2024. None of these readings is consistent with an economy that needs lower rates from the Federal Reserve and in combination they make rate cuts sound a little nutty. I think it’s important to remember that the Fed has done more damage by keeping rates too low for too long than it has ever done by keeping rates too high.
Last week I said: “I have thought that this administration’s talk regarding tariffs was more of a bargaining position than a final policy, and while I still believe Friday’s (i.e., January 31st) an-nouncement will be tweaked and walked back, investors and traders should prepare for an al-ternate, and volatile, outcome.”
I still believe that to be the case and initial tariffs have been temporarily stayed. But at some point soon it is possible for the game of “Tariff Chicken” to end badly if neither party blinks and steers clear.
Everyone at Nations Indexes hopes you have a great and profitable week!
Scott
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