Your Week’s Volatility Market Commentary — Information Is Your Edge

The Weekly Takeaway:

• The S&P 500 lost 9.08% for the week as the Trump administration imposed tariffs. It lost a combined 10.53% on Thursday and Friday. It is now down 13.73% year-to-date and is 17.46% below its 52-week high;
• The Nasdaq-100 lost 9.77% for the week. It lost a combined 11.15% on Thursday and Friday. It is now down 17.20% year-to-date and is 21.71% below its 52-week high putting it in “bear market” territory;
• VolDex (ticker VOLI) gained 90.59% to close at 36.44. It has not closed above that level since April 22, 2020;
• TailDex (ticker TDEX) gained 220.50%. It gained 67.09% on Friday. We have noted an unwillingness on the part of traders to buy deep out-of-the-money puts. That ended this week;
• S&P 500 CallDex rose 81.99% and S&P 500 PutDex rose 129.53%;
• Nasdaq-100 VolDex rose 75.04% to close at 42.47 and Nasdaq-100 TailDex rose 381.13% to close at 69.60;
• VolDex rose for all the single names we cover. It rose by more than 50% for all these names with the exception of TSLA. VolDex on TSLA rose 21.34%;
• Implied volatility rose for treasury bonds with VolDex gaining 25.92% to close at 17.95 and CallDex rose by 44.14% as investors fleeing equities bought treasury bonds and traders bought treasury bond calls to profit if the flight to quality continues;
• The Nations Investor Optimism Index fell 86.47% for the week to close at 3.00. It was below 1.00 during the day on Friday. It has not closed above 50 since January 24th.

Equity Index Volatility:

The S&P collapsed on Thursday and Friday as tariffs were imposed on imports. Implied volatility spiked in response.

VOLI closed at its highest level since the COVID pandemic. S&P 500 PutDex closed at its highest level since the COVID pandemic as well. It has only closed higher than Friday’s close of 159.36 on 100 trading days since inception on January 31, 2005 (5,076 trading days) and most of those were clustered in 2008 and in March and April 2020. TDEX has closed above 36.89 on just 44 days since inception.

Short-dated volatility spiked as well. 7-Day VolDex closed at 52.11. That says the option market is expecting moves of 3.26% each day next week.

The Nasdaq-100 lost 9.77% for the week as the biggest names led the way lower. AMZN, AMD, AAPL, NVDA, and META all lost more than 10%. Nasdaq-100 VolDex rose by 75.04% while Nasdaq-100 TailDex rose 381.13%.

Why It Matters…It is likely too late to purchase protective options but the reluctance of traders and hedgers to buy deep out-of-the-money puts prior to this week, a factor we have been discussing extensively, was an opportunity to buy those options in the face of a looming trade war which we are now engaged in. Objective data regarding the cost of these options is a tool traders and investors should be using.

Another phenomena we’ve been discussing is the disparity in RiskDex (the ratio of PutDex to CallDex) in the major equity indexes. We’ve been suggesting using that disparity to implement protective relative value trades.

You can find the RiskDex fact sheet here:

Nations RiskDex Fact Sheet

This week’s S&P 500 volatility results.

Why It Matters…Our index values are intended to provide option traders with objective data so they can trade with insight rather than a hunch or intuition. They suggest it is too late to buy protective strategies and the first priority for investors right now should be “do no harm” meaning don’t panic sell equity holdings or blindly buy put options.

Nations Investor Optimism Index:

The Investor Optimism Index collapsed from its already-low level last week and closed at just 3.00, the lowest close since August 2024 when a surprise interest rate hike by the Bank of Japan and weak domestic economic data pressured the stock market. The index traded below 1.00 during the day on Friday before rebounding very slightly.

The index takes into account the current levels of S&P VolDex, TailDex, and RiskDex and compares them to their rolling 2-year ranges. It has not closed above 50 since January 24.

Our Optimism Index can be a great contrarian indicator since the best average subsequent 20 trading day returns come when the index closes below 10.00. However, as you can see in the far right-hand column, there are also some sickening additional drawdowns when the index closes below 10.00.

Other Equity Indexes:

The Russell 2000 index of small capitalization stocks fell by 9.70% this week. The Russell 2000 remains the worst performer on the year (down 18.08%) and is 25.93% below its 52-week high.

All the option metrics for the Russell 2000 fell rose on the week with PutDex gaining 118.17% and 7-Day PutDex gaining 186.68%.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes broke below 4.00% and closed the week at 3.985%, down from 4.255% a week ago. The decline in yields was driven by “flight to quality” buying of treasuries on the part of investors fleeing equities. RiskDex measures fell slightly only because CallDex (the normalized price of the 30-day, 1 standard deviation out-of-the-money call option) rose more than PutDex.

As we said last week about that week’s price action in TLT options, “This suggests traders are setting up for more volatility in treasury prices and some expect (fear) a spike in treasury bond prices either because of continued economic weakness or continued weakness in equity prices driving more flows into treasury bonds.”

Why It Matters…As we pointed out last week, “Treasury bond option volatility can be a signal of directionality for equities since fear of substantial declines in equity prices will be transmitted to treasury bond option prices.” This flight to quality is common during equity selloffs and savvy option traders can use out-of-the-money call option in treasury bonds to hedge their equity portfolio.

Treasury bond RiskDex can be a particularly good indicator of perceptions for risk in the EQUITY market. If traders are reaching to buy treasury bond calls at the expensive of puts that is a sign of significant concern for equities.

Bitcoin:

VolDex on bitcoin rose 16.57% for the week even though bitcoin rose by just 0.31%. The move in volatility was a general reaction to higher implied volatility in other asset classes.

Bitcoin VolDex had been drifting lower as you can see until bottoming near 45. It continues to display lower highs and lower lows so it will be interesting to see if volatility sellers rush in once equity prices and volatility stabilize.

Gold:

As we pointed out last week, many traders start to pay more attention to gold when the stock market declines as factors beyond pure fundamentals play a part in the price action.

Surprisingly, the price of gold fell by 1.53% this week. Not so surprisingly, Gold VolDex rose by 28.12% and CallDex rose by 36.43%. The price of gold itself may have fallen but some were buying calls expecting a spike in gold prices if the equity picture worsens from here.

As we said last week, “Gold VolDex has traded in a narrow range over the past 52-weeks and is in the lower portion of that range. Long volatility trades in gold make sense given cheaper option prices and the possibility of substantial upheaval in all asset prices.” Gold VolDex closed the week at the 76th percentile of its 52-week range so option prices can no longer be considered cheap. But traders who used the opportunity to buy volatility were rewarded.

However, Gold CallDex has generally been trending lower and despite this week’s spike is at just the 44th percentile of its 52-week range so buying call spreads to get upside exposure to gold prices while using the call skew common in gold options is a reasonable speculative trade.

Silver:

Silver prices fell 12.64% this week as fears of an economic contraction hit silver which has more industrial uses than gold. Out-of-the-money put options in SLV were particularly bid.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for just 49.70% of all SPY option volume this week as 0DTE traders pulled back during the worst of the selloff; 0DTE SPY volume on Thursday and Friday was just 43.39% of all SPY volume.

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.

Equities:

This week’s news was bad for all the single names we cover. Most fell by more than 10%. GOOG was the best performer, losing just 4.27% for the week as the highest fliers (NVDA) or those seen as most vulnerable to tariffs (AAPL), were hurt the most.

Implied volatility spiked in all these names, as you would expect. AAPL saw the largest increase in every metric. It is interesting that MSFT CallDex rose more than PutDex.

AAPL is seen by many as more susceptible to tariffs, particularly regarding China, than the other names.

The AAPL VolDex value is at its highest level since we started calculation on January 1, 2022. Many investors who want to add AAPL to their portfolio have been waiting for a pullback and while the forward PE is still 25.2, shares are down 24.77% year-to-date and 20.15% for the past month.

Selling cash-secured out-of-the-money put options can be one way to potentially add AAPL to a portfolio while taking advantage of high put option prices. However, this is an investment strategy not a trading strategy and the put seller has to be ready, willing, and able to buy the shares if they are trading below the strike price of the put option when the option expires. Consider this more of a different type of “Buy” order for the shares rather than an option trade.

What if you’re interested in this strategy in one of the other names we cover?

We’ll continue to comment during the week via our X account, @Nations_Indexes.

Scott’s Weekly Commentary:

I was wrong. I assumed the tariff saber rattling coming from the Trump administration was a bargaining position or negotiating tactic. I assumed the president would get some concessions, declare victory, and say “never mind.” That’s not what happened and instead, my fear, one I have articulated here, that China would retaliate has come to pass. As I said last week, “we should remember there are several other parties involved here and not all of them have to answer to an electorate.”

China’s political leadership is the party that doesn’t have to answer to an electorate so they can afford their refusal to be pushed around. We imposed a 54% tariff on them and the $435 billion worth of goods we import and they responded with a 34% tariff on the $143 billion worth of goods we export to them. That is mostly agricultural commodities, machinery, and aircraft. Brazilian soybean farmers are celebrating. German industrial machinery makers are celebrating. Airbus and China’s domestic aircraft manufacturers are celebrating. American investors are getting in a defensive crouch before they check their 401(k) and IRA balances.

Tariffs are taxes and unfortunately they’re regressive because they hurt the most for those who earn the least. Many Americans won’t care if the price of an inexpensive microwave doubles to $500 because they can afford the increase on something they buy every few years. But add that to the extra cost for an economy car and shoes and clothes for the kids and some families will really be in a bind.

What should traders and investors be doing? First, do no harm. Don’t panic sell just because of the panic. Take the Warren Buffett point of view: you get to buy something you want to own anyway but at a discount to where it was at the start of the year.

Option prices are high so option strategies should focus on defined-risk structures that are short volatility. One thing to think about, implied volatility for out-of-the-money call options tends to fall very fast once stocks recover from this sort of selloff. It will be entirely possible, even likely, that long out-of-the-money call option positions will lose money even if the underlying rallies. I’d rather sell tight put spreads (strike prices that are near each other) that show an advantageous risk/reward profile.

If you feel like you just have to do something, then rebalance your portfolio because your bond allocation has grown in value as your equity allocation has dropped. But remember, your biases are always at work and in times of stress they can run amok. Don’t fall for it.

Everyone at Nations Indexes hopes you have a healthy and profitable week.

Scott