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

The Weekly Takeaway:

• The S&P 500 rose 1.50% this week after gaining 1.88% during the previous week. The market rallied 4 out of 5 days this week and ended with a gain of 1.03% of Friday thanks to jobless data that was in line with expectations. The S&P is now up 2.02% YTD and is just 2.39% below its 52-week high;
• The Nasdaq-100 gained 1.97% this week after gaining 2.03% last week thanks to a gain of 2.39% on Tuesday. It is now up 3.57% YTD and is 2.07% below its 52-week high;
• The Russell 2000 was the big winner this week with a gain of 3.19%. It is still down 4.39% YTD and is 13.55% below its 52-week high;
• VolDex (ticker VOLI) fell by 11.69% to close at 13.75. It has now declined 7 of the last 9 weeks and is 66.86% below the closing level on April 8;
• TailDex (ticker TDEX) fell by 6.70% to close at 12.54. It closed at the 15th percentile of its 52-week range. Investors have been very quick to sell TailDex aggressively after market bottoms;
• Nasdaq-100 VolDex fell 9.79% to close at 17.63;
• We have expanded the list of asset classes we cover to include high-yield bonds, 7-10 year treasury notes, and emerging market equities;
• We have expanded the list of equities we cover to include BRKB, JPM, LLY, PLTR, and WMT. We now cover not only the names with the most active option markets but the 10 largest names in the S&P;
• Nearly all of the equites we cover were higher on the week. TSLA, BRKB, PLTR, and WMT were the only names that were lower with TSLA losing 14.81%. META was the big winner with a gain of 7.76%;
• VolDex on the single names we cover fell except for TSLA which saw VolDex gain 7.65% for the week;
• The Nations Investor Optimism Index rose 80.59% to close at 42.80. It has not closed above 50 since January 24th;

Equity Index Volatility:

Implied volatility and option prices generally fell during the week as the S&P gained 4 out of 5 days. Investors liked Friday’s jobs data which showed 139,000 new jobs created in May versus consensus expectations of 129,000.

VolDex values for the S&P 500, Nasdaq-100, and Russell 2000 are all below the 15th percentile of their 52-week ranges. TailDex values for all three are below the 22nd percentile of their 52-week ranges with the S&P and Nasdaq at the 14th and 12th respectively. We continue to believe directional trades are best approached from a long volatility point of view even though summer tends to be a lower volatility period for stocks.

Profits on long TailDex trades are fleeting and traders rush to sell those put options whenever they spike but the current level is attractive for hedgers.

RiskDex fell by 26.35% and is back below 3.00.

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. Volatility is mean-reverting and that is a phenomenon traders can take advantage of in both directions. But you have to understand what normal is, what the “mean” is, in order to do so. This historical data shows that equity index volatility and option prices are very low in relation to their recent ranges and short volatility trade structures are best avoided. They may work, but the risk/reward when option prices are this low is unattractive.

You can see the week’s volatility results for the S&P 500 below.

The Nasdaq-100 outgained the S&P slightly as tech names all turned in very solid performances with the exception of TSLA which got caught in the spat between the president and Elon Musk. Nasdaq-100 volatility was lower with VolDex back below 18.00 and RiskDex below 2.50.

Nasdaq-100 VolDex closed at just the 12th percentile of its 52-week range.

Last week we pointed out that “Nasdaq-100 CallDex is nearing the 25 level which has been a floor for the past 52 weeks.” That floor held with Nasdaq-100 CallDex gaining 10.15% and closing at 29.54.

Last week we also said, “A bullish thesis in the Nasdaq-100 is likely best expressed by buying out-of-the-money calls.” That remains the case because equity index options are relatively cheap but Nasdaq-100 CallDex is now at the 34th percentile of its 52-week range so this trade is less compelling.

Nations Investor Optimism Index:

The Investor Optimism Index rose another 80.59% to close at 40.12. We’ll be watching the all-important 50 level which the index hasn’t touched since January 24.

Other Equity Indexes:

Volatility was mixed in the Russell 2000 which, surprisingly, outpaced both the S&P and Nasdaq. Small cap investors have been waiting for this sort of week. You’ll note that call buyers were particularly active.

Why It Matters…Last week we pointed out that “CallDex on the Russell 2000 closed at just 34.68 which is the 3rd percentile of its 52-week range. That is incredibly cheap so buy out-of-the-money calls in the Russell 2000 to express your opinion even if it is bearish (e.g., shorting IWM and buying the out-of-the-money call as a hedge).”

This certainly worked on every level as the Russell 2000 rallied AND out-of-the-money call options rallied even more. Russell 2000 CallDex closed this week at the 44th percentile of its 52-week range so we consider them fairly priced and no longer cheap.

We’ve added the emerging market equity index to our roster of equity indexes. EEM is the underlying ETF we use. EEM VolDex fell slightly on the week to close at 15.90.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes rose by 9 basis points on the week before closing at 4.510%.

Treasury note and bond volatility fell as the jobs data came out in line with consensus expectations and eased worries that strong job growth might spur inflation.

Treasury Bond VolDex remains stuck at the 15 level. This means that structures that are long at-the-money TLT options are unlikely to be hurt by volatility dropping dramatically. VolDex levels in the low teens are to be bought regardless of directional thesis.

You can see that Treasury Bond VolDex has not been convincingly below 15.00 since March.

We have just begun calculating our metrics on treasury notes with the underlying IEF but we’ll be watching this as well. The relative moves in Treasury Note CallDex and PutDex are worthy of our future attention.

Why It Matters…RiskDex remains high in TLT despite a small decline this week so traders who are bullish on treasuries can take advantage with structures which sell puts or put spreads. Traders who are agnostic as to direction can take advantage by trading this structure delta neutral.

Bitcoin:

VolDex on bitcoin fell by 6.69% to close at 40.61. Traders continue to sell bitcoin volatility as it seeks its equilibrium level. We will not try to pick a bottom but any price action below a VolDex level of 40 should be interesting.

Bitcoin VolDex continues to trend lower and rallies in Bitcoin VolDex should be sold although we would not suggest selling Bitcoin vol below the 45 level.

How To Trade It? We are hesitant to be naked short bitcoin options and would not sell volatility at current levels but selling a put spread at higher levels if you’re bullish on bitcoin is a logical trade. Bears can sell a call spread when we get a spike in implied volatility. Those who are agnostic as to direction, or who think bitcoin is unlikely to move over the next 30 days can do both. We would not be long volatility in bitcoin.

Interestingly, you’ll note that Bitcoin RiskDex fell back below 1.00.

Gold and Silver:

Gold rose by 0.52% this week and volatility was generally higher with TailDex in the red (RiskDex fell slightly).

Gold VolDex closed at the 35th percentile of its 52-week range and continues to “dribble” lower as you can see. Gold and Bitcoin are the only broad asset classes we would consider short vol trades in. But we would choose defined risk structures.

We have learned that several traders are using our index values to spread gold options versus silver options in a fascinating trade. You can see this week’s silver volatility results.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for 58.31% of all SPY option volume this week and accounted for 62.02% of all SPY option volume on Wednesday.

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:

We have expanded the list of single names we cover. This week offered good news for most of the names we cover which now includes the names with the most active option markets as well as the 10 largest names in the S&P 500.

VolDex fell for all the single names we cover with the exception of TSLA.

The moves in RiskDex in these names are interesting. You’ll note that TSLA RiskDex rallied strongly and is now again above 1.00. PLTR RiskDex also rallied leaving no single name with a RiskDex value below 1.00.

TSLA shares got caught in the middle of the spat between the president and Elon Musk. Volatility in TSLA was generally higher, as you would expect. The break in CallDex stands out as traders have been attracted to out-of-the-money calls in TSLA to express their bullish sentiment.

But don’t be fooled, TSLA CallDex remains in the middle of its 52-week range.

Scott’s Weekly Commentary: