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

The Weekly Takeaway:

• The S&P 500 lost 0.38% this week. It is now up 1.38% for the year;
• The Nasdaq-100 lost 0.92% this week. It is now up 1.11% for the year;
• S&P 500 VolDex (ticker VOLI) gained 7.41% this week and closed at 12.70. That is still just the 6th percentile of its 52-week range;
• S&P 500 TailDex (ticker TDEX) gained 27.42% this week after gaining 16.73% in the previous week. Despite this two-week gain it is still at just the 15th percentile of its 52-week range;
• S&P 500 CallDex fell by 16.58% on the week as traders lost faith in the prospects for a strong rally over the next 30 days. CallDex closed on Friday at the 4th percentile of its 52-week range;
• Important historical metrics for all our indexes including average, median, and critical percentile closes are available to subscribers at NationsIndexes.com;
• VolDex on the Nasdaq-100 rose by 5.54% this week to close at 17.77;
• TailDex on the Nasdaq-100 rose by 22.61%. The rallies in TailDex for both the S&P 500 and Nasdaq-100 do not yet put either index in territory that would be concerning but the direction and magnitude of the moves signal some concern. You can learn more about TailDex at Learn More About TailDex;
• The yield on Treasury Notes rose by 6.0 basis points on the week to close at 4.231%. That is the highest level since the first week in September. Nonetheless, Treasury Bond VolDex fell by 0.27%, closing at just 9.72. Last week’s decline in Treasury Bond option prices was due to the passing of the jobs data catalyst. This week’s decline in option prices is more difficult to explain;
• Bitcoin gained 5.71% this week and Bitcoin VolDex continued its decline, losing 4.65% on the week and closing at just 37.91;
• Gold futures gained 1.69% this week and silver futures gained 11.78% after gaining 10.41% in the previous week in a continuation of a remarkable rally and similarly remarkable realized volatility. Silver VolDex closed at 77.74, a gain of 19.71% for the week while silver CallDex gained 25.82%;
• VolDex for individual names was higher for every name with the exception of JPM which experienced the post-earnings vol crush, TSLA (-2.67%), and META (-0.36%);
• The Nations Indexes Optimism Index® fell by 9.92% to close at 77.51. Our Optimism Index is always available in real-time on our home page at NationsIndexes.com;
• You can always learn more about all our indexes at Learn More About Our Indexes;
• Email us at Support@NationsIndexes.com for your personal discount code for a 3-month subscription to our real-time data. Trade with data, not a hunch.

Equity Index Volatility:

The S&P 500 lost 0.38% for the week and closed at 6940.01.

S&P 500 volatility was generally higher with all 30-day metrics other than CallDex gaining ground. RiskDex which is the ratio of out-of-the-money put prices to out-of-the-money call prices, gained 36.70% for the week and closed on Friday at 4.29.

The rally in RiskDex is particularly noteworthy as it had itself experienced significant volatility during the week. Friday’s action in RiskDex signals investor’s willingness to pay up for protective puts but little interest in buying upside exposure via calls.

Friday’s 4.29 closing value for RiskDex puts it at the 43rd percentile of the 52-week range.

You can learn more about RiskDex at Learn More About RiskDex;

S&P 500 7-Day VolDex is one of the few S&P vol measures to lose ground on the week as it lost 2.64% to close at just 9.67. This should not be construed as optimism on the part of investors but rather it has more to do with the upcoming holiday-shortened week which impacts very short-dated options, like those used in our 7-Day measures, more so than longer-dated options used in 30-Day metrics.

Historical metrics (Average, median, 10th percentile, 25th percentile, 75th percentile, and 90th percentile) for all out indexes are available to subscribers at NationsIndexes.com.

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 – the current environment, while not unique, is unusual. 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.

The Nasdaq-100 lost 0.92% for the week including a loss of 1.07% on Wednesday. While the year is still young, the Nasdaq-100 is trailing the S&P 500, Russell 2000, Dow Jones Industrial Average, and the S&P 500 Equal Weight Index.

Nasdaq-100 volatility metrics were higher with the exception of CallDex. Nasdaq-100 RiskDex gained 22.81% for the week and closed at 3.48.

Nasdaq-100 VolDex is still at just the 10th percentile of its 52-week range but Nasdaq-100 RiskDex is at the 58th percentile of its 52-week range. The implication is that while option prices are low, traders are more pessimistic than optimistic for the Nasdaq-100 over the next 30 days.

You can learn more about VolDex at Learn More About VolDex;

Why It Matters…Traders need to have the objective data provided by our indexes to trade in a way that doesn’t rely on hunches or guesses.

Nations Investor Optimism Index:

The Investor Optimism Index® fell by 9.92% to close at 77.51.

The index takes into account the current levels of S&P 500 VolDex, TailDex, and RiskDex and compares them to their rolling 2-year ranges. It is plotted on a 0 to 100 scale.

Our Optimism Index is now available in real-time on our home page at Nations Optimism Index.

VolDex Term Structure:

S&P 500 VolDex term structure on Friday’s close retained its very normal shape with 7-Day VolDex still below 10.00 and very low by any measure. Traders with a very short time horizon should use this to their advantage when trading resumes on Tuesday.

Option Window:

Option Window fills in the blanks between TailDex, PutDex, VolDex, and CallDex and reveals how trade flows were pushing option prices. This week you can see strong buying of all strike prices from at-the-money and below while traders were selling out-of-the-money calls.

While the decline in the S&P 500 index was modest, S&P 500 option flows had a decidedly pessimistic tone.

1DTE Options:

S&P 500 1-Day VolDex rose by 17.03%.

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.

Other Asset Volatility:

Treasury Bonds and Notes:

Treasury Bond CallDex rallied by 12.90% this week as some equity investors bought Treasury bond call options as a hedge. TLT, the Treasury bond ETF and underlying instrument for our Treasury bond volatility metrics, is still stuck in a range and that is reflected in option prices. But the yield on 10-year Treasury notes closed at 4.231%, the highest level since the first week in September.

Treasury Bond implied volatility remains low although, Treasury Bond TailDex gained 70.77% on the week in an extreme move caused by traders reaching to buy very cheap, deeply out-of-the-money Treasury bond puts.

It appears traders are willing to buy Treasury Bond TailDex when it ventures below 5.00.

Why It Matters…For many weeks now we have been noting the opportunity to buy at-the-money Treasury bond options at historically low prices. This trade has not worked. Regardless, short volatility structures in treasury bonds are still to be avoided. The possibility of a violent rally in Treasury bond volatility exists in the face of substantial economic and geopolitical uncertainty.

Bitcoin:

Bitcoin staged a nice rally for the week despite a loss of 2.36% on Thursday. Despite that, Bitcoin CallDex fell by 10.07% for the week as traders sold covered calls in recognition of the fact that Bitcoin has rallied from below 85,000 in the middle of December to 95,660 on Friday and out-of-the-money calls could be sold at strike prices which are attractive relative to those available a month ago.

Bitcoin CallDex fell by 10.07% as bitcoin rallied.

You can learn more about CallDex at Learn More About CallDex;

The strike price represented by Bitcoin CallDex is approximately 108,000.

Precious Metals:

Silver rose by 11.78% this week after gaining 10.41% in the previous week. Silver futures closed at 89.945 but traded as high as 93.700 on Thursday.

Silver VolDex gained another 19.71% this week and closed at 77.74. That level says the market expects daily moves of 4.86% from silver over the next 30 calendar days.

Equities:

We have expanded the list of single names we cover to include not only the most dynamic stocks in the S&P 500 and the stocks with the highest option volume, but also the largest names in the S&P 500.

Equities were mostly in the red this week with just 5 of 14 names gaining ground.

VolDex was less mixed with gains predominating for a second straight week. JPM VolDex fell by 11.39% but that was a consequence of JPM releasing Q4 earnings.

We note that MSFT VolDex gained 5.69% for the week to close at 30.97 after spiking on Thursday and closing at 44.41 on that day. This was a result of MSFT shares losing 3.73% combined on Tuesday and Wednesday before falling again on Thursday to their lowest level since May. They posted a small gain on Friday.

MSFT VolDex closed on Friday at the 44th percentile of its 52-week range so MSFT at-the-money options are useful for both long vol and short vol strategies.

TSLA VolDex, on the other hand, is at just the 3rd percentile of its 52-week range making long volatility structures attractive regardless of directional thesis. But TSLA CallDex is at just the 1st percentile of its 52-week range and PutDex is at just the 2nd percentile so these are attractive as well.

This is the best opportunity in recent history for traders to use TSLA options to express their directional thesis.

Scott’s Weekly Commentary: