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

The Weekly Takeaway:

• The S&P 500 rose 1.88% this week thanks to a gain of 2.05% on Tuesday. It is now up 0.51% YTD and is just 3.83% below its 52-week high;
• The Nasdaq-100 gained 2.03% this week thanks to a gain of 2.39% on Tuesday. It is now up 1.56% YTD and is 3.97% below its 52-week high;
• VolDex (ticker VOLI) fell by 16.51% to close at 15.57. It has now declined 6 of the last 8 weeks and is 63.49% below the closing level on April 8;
• TailDex (ticker TDEX) fell by 23.59% to close at 13.44. It closed at the 19th percentile of its 52-week range;
• Nasdaq-100 VolDex fell 14.38% to close at 19.55;
• 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;
• All of the equites we cover were higher on the week with PLTR the biggest gainer, rising 6.87%.
• VolDex on the single names we cover generally fell with VolDex on AAPL, GOOG, MSFT, and NVDA dropping by more than 10%;
• The Nations Investor Optimism Index rose 168.30% to close at 23.70. It has not closed above 50 since January 24th;

Equity Index Volatility:

Implied volatility and option prices generally fell during the week following Tuesday’s rally. Nearly all volatility measures on the S&P 500 are in the lower-third of their 52-week ranges. While summer is usually a less volatile period, given the low cost of options and the possibility of surprises regarding tariffs and the tax bill under consideration in Washington D.C., we suggest traders express any directional thesis by buying options or option spreads. S&P CallDex closed on Friday at the 29th percentile of its 52-week range and S&P PutDex closed at the 22nd percentile.

TailDex (TDEX) closed well below the 15 level which we continue to watch. Those deep out-of-the-money puts have been shunned by hedgers.

RiskDex is at a slightly more moderate level and closed at the 31st percentile of its 52-week range so collar strategies on SPY make sense for those looking for a less expensive or zero-cost hedge.

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.

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. Nasdaq-100 volatility was lower with VolDex, CallDex, and PutDex all falling by more than 10%.

Nasdaq-100 VolDex closed at just the 18th percentile of its 52-week range.

Interestingly, Nasdaq-100 CallDex is nearing the 25 level which has been a floor for the past 52 weeks.

Why it Matters…A bullish thesis in the Nasdaq-100 is likely best expressed by buying out-of-the-money calls.

Nations Investor Optimism Index:

The Investor Optimism Index rose 168.30% to close at 23.70. That level is still unimpressive. We’ll be watching the all-important 50 level which the index hasn’t touched since January 24.

The index takes into account the current levels of S&P VolDex, TailDex, and RiskDex and compares them to their rolling 2-year ranges.

Other Equity Indexes:

Volatility was lower across the board in the Russell 2000 which gained just 1.30% this past week.

Why It Matters…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).

We’ve added the emerging market equity index to our roster of equity indexes. EEM is the underlying ETF we use. EEM VolDex rose slightly on the week to close at 15.95.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes fell slightly on the week before closing at 4.416%.

Treasury note and bond volatility fell as these markets settled following a substantial amount of stress in April and concerns that the tax bill under consideration in Washington would expand the federal budget deficit.

Treasury Bond VolDex is again 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.

We have just begun calculating our metrics on treasury notes with the underlying IEF so we’ll be watching this as well.

Why It Matters…RiskDex remains high in TLT 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 8.99% to close at 43.52. Traders continue to sell bitcoin volatility after option prices advance.

You will notice that we have expanded our roster of bitcoin indexes and we now calculate the full roster of our indexes on bitcoin.

Bitcoin VolDex continues to trend lower and rallies in Bitcoin VolDex should be sold.

How To Trade It? We are hesitant to be naked short bitcoin options but selling a put spread if you’re bullish on bitcoin is a logical trade. Bears can sell a call spread. 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 is above 1.00 which means out-of-the-money puts are now more expensive than out-of-the-money calls,

Gold:

Gold fell by 1.99% this past week as geo-economic concerns continued to ease. Gold is falling from recent all-time highs so this week’s decline accompanied a general decline in implied volatility in gold. You can see that gold VolDex continues to fall from April’s very high levels. Gold is one of the very few markets (along with Bitcoin) we would approach from a short volatility (but defined risk) angle.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for 58.97% of all SPY option volume this week.

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 all 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 was a little more mixed this week than in some previous weeks although there is much more red than green in the past week’s VolDex table.

The moves in RiskDex in these names is interesting. As you can see below, only TSLA and PLTR have RiskDex readings below 1.00. Only MSFT and JPM have RiskDex readings above 2.00. It is just a rule of thumb but higher RiskDex readings correspond to ownership by those with a point of view that is more like that of a long-term investor and a lower RiskDex reading corresponds to more speculative owners. This makes sense as speculators would tend to want to own out-of-the-money calls and their buying will drive down RiskDex. Long-term investors are more likely to occasionally buy puts and/or sell covered calls and either would drive up RiskDex.

You can see some of this recent price action by looking at this week’s results for PLTR. It has the second-highest VolDex reading, trailing only TSLA.

When RiskDex falls below 1.00 that signals that markets see more implied upside than implied downside for the stock. RiskDex for an individual name can stay below 1.00 for some time, and can fall further below 1.00. But there is a natural lower bound for RiskDex and savvy traders will take advantage of that.

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

Scott’s Weekly Commentary:

It’s never good for equities when investors are worried about the Treasury bond market. It is easy to forget that we have $36 trillion in U.S. Treasury debt outstanding and much of it is held by people who don’t like us very much (China holds about $750 billion in U.S. Treasury debt).

The market capitalization of the U.S. stock market is larger than that at about $60 trillion but the treasury market is large enough, and important enough, that it can sometimes overwhelm the equity markets. That was one of the reasons things got bad for equities in April.

The current tax bill under consideration in Washington passed the House by a single vote (215-214) and heads to the Senate which will make substantive changes but the bond market will be watching the deficit implications closely and that will drive sentiment in the equity markets. Senate leaders want to finish the process by the July 4 holiday, and delays are likely, but the political process will be the news investors have to focus on in June. Occasional spasms of volatility are likely as news emerges/leaks. It won’t be fun but there will be opportunities for option traders to make money.

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

Scott