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[00:00:00] Introduction
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Welcome. Our goal is to make you a better option trader so you can make more money. We’ll do that by quantifying what has been subjective in the option world so you can trade with knowledge and information rather than opinion or hunch. This allows you to identify opportunities that were hidden before and to craft better trade structures.
You may never have really understood how volatility impacts your option trading, but we’ll learn about volatility in a new way. Again, with the goal of making you a better trader.
[00:00:32] Meet Scott Nations
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Hi, I’m Scott Nations. I spent more than 25 years as a proprietary option trader on the floor of the Chicago Mercantile Exchange.
We created our suite of volatility indexes to make us better traders. And now we want to use them to help make you a better option trader. Let’s dive in.
[00:00:53] Understanding Volatility and Implied Volatility
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Understanding volatility is the key to understanding option pricing. You’ve probably heard the term implied [00:01:00] volatility, but what does it really mean?
Well, implied volatility is simply the market’s estimated future price movement as implied by current option prices. That’s right. We see options trading, and those prices imply future price movement in whatever stock or ETF the option is on. That is implied volatility. You might remember that every option pricing model or formula has certain inputs, including the price of the underlying stock or ETF, the strike price of the option, the time to expiration, and the interest rate currently at work.
But there’s also one other input, volatility. Now those first four inputs I mentioned, those are all knowable or observable. We can see where the underlying stock or ETF is trading. We can calculate the time to expiration. We know the strike price. But [00:02:00] it’s impossible to know how volatile the underlying stock or ETF is going to be between now and the time that that option expires.
But there’s a way to figure out the market’s best guess for how volatile it’s going to be. And again, that’s by looking at the price of options that are actually trading. If we do that and take those other inputs, we can reverse engineer the volatility input that the market is relying on. And again, that volatility input is the market’s best estimate for the future course of volatility.
It’s the market’s best guess about the amount of risk during the term of the option.
[00:02:40] Introduction to VolDex
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Now, our volatility index is called VolDex. And it calculates this implied volatility, but it does so in a special way. It does so by focusing on the options that are most important to option traders, the ones that trade the most volume, the ones that are most liquid.
Those are at the money [00:03:00] options. At the money options are the ones used in the calculation of VolDex.
So what do I mean by at the money options? Well, at the money options are those options where the strike price is very close to where the underlying stock or ETF is trading right now.
[00:03:17] Flaws in VIX and the Need for VolDex
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Now you’ve probably heard of a volatility index and it’s likely to be VIX. VIX is published by CBOE. VIX is certainly the first and the best known volatility index, but it’s deeply flawed, which is one reason we created VolDex.
How is VIX flawed? Well, let’s take a look. First, VIX uses nearly every out of the money option listed in the expirations that are used.
That means it’s impossible to know where any change in VIX is coming from.
Let’s say VIX is up two percent on the day. Is that coming from out of the money puts? Well, that would tell you one thing. Is it coming from out of the money calls? That would tell you something very different. Is it [00:04:00] coming from At the money options?
Well, that would tell you a third thing. What if it’s coming from deep out of the money puts? Well, that’s a very different picture.
All four scenarios are important because all four of those scenarios describe a very different market. Unfortunately, the way VIX is constructed means it’s impossible to know what is driving the change in VIX.
Second, because of the formula used to calculate VIX, deep out of the money put options -those with strike prices well below where the market is trading right now- have an outsized influence on the VIX value. Now, does it make any sense for a 30 day put option that’s nearly 70 percent out of the money to have outsized influence on your volatility index?
We certainly don’t think so, but that’s often the case with VIX. It’s often true that put options that are 65 or 70 percent out of the money are included in the VIX [00:05:00] calculation. Another problem with these deep out of the money puts is that they have huge bid ask spreads. That is the difference between the bid price and the ask price.
So that any change in a bid or an offer price can have an outsized influence on the input and the value of VIX. We don’t think that makes much sense either.
In short, VIX is impacted by skew. or the tendency for different strike prices in the same expiration to display different implied volatilities. And let’s be clear, skew isn’t implied volatility.
In fact, it’s an illogical quirk in the option market, but it’s one that’s incorporated into the VIX calculation.
[00:05:46] Nations Suite of Volatility Indexes
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To overcome this, we created the Nations suite of volatility indexes. The goal is to avoid the faults inherent in VIX by deconstructing skew so that we can isolate each important range of strike prices. The [00:06:00] entire swath of strike prices listed is generally called the skew and that’s the term I’ll use.
But let’s look at our suite of volatility indexes.
The first one in our flagship volatility index is called VolDex. VolDex measures implied volatility by looking at purely at the money options. The options that are most liquid, often have the most volume, and provide the most information. What are at the money options?
At the money options are those with a strike price that’s very close to where the underlying stock or ETF is trading right now.
Our second index is CallDex. CallDex measures the normalized price of out of the money call options. In the case of CallDex, it’s out of the money call options that are one standard deviation out of the money.
Now, this is important because these calls can be very volatile in and of themselves, and they also transmit a significant amount of [00:07:00] information about what market participants think the outlook for the underlying stock or ETF is.
Our third volatility index is PutDex. And it measures the normalized cost of a one standard deviation out of the money put.
Again, by knowing the value of PutDex, we get more information. And again, we’re trading with information, not a hunch or a guess.
Our fourth index is RiskDex. It’s simply the ratio of PutDex to CallDex. And as such, it It can give us some clues about what the market thinks about future movements.
If RiskDex is high, that means put prices are expensive relative to call prices. That says something. On the other hand, if RiskDex is low, that means call prices are relatively high compared to put prices. That tells us something very different.
Our fifth and final index is TailDex.
TailDex measures the cost of deep out [00:08:00] of the money puts, the sort of puts that you might use to protect against a severe downdraft in prices. Now, TailDex measures the normalized price of a three standard deviation out of the money put. That three standard deviation threshold is often considered the threshold for a tail event.
Hence, TailDex.
Since TailDex measures the cost of these options, it provides significant information about the market’s perceptions of the likelihood of a tail event. Isn’t that information you’d like to have?
Now let’s dig in and learn about each of these unique metrics and how savvy traders can use them to make money.
[00:08:40] Exploring VolDex
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The first is VolDex. How can we use VolDex?
As we’ve discussed, VolDex is a measure of the market’s best guess for realized volatility over the next 30 calendar days.
But how can we actually use that information to understand the stock market better and become a more profitable trader? Well, one simple way to use [00:09:00] VolDex is to remember that it measures the relative cost of options. So when VolDex is historically high, then defined risk structures that are short volatility, like selling vertical spreads, is a good place to start.
Conversely, when VolDex is historically low, buying options or option spreads is a good place to start when thinking about your trade structures. Now, let’s take it a step further. Remember that VolDex measures annualized volatility. How can we take that annual number and use it to calculate the expected move over a shorter period of time?
Without getting too mathy, it’s relatively simple to do. Begin by taking the VolDex value for the asset you’re interested in. In this case, we’ll look at VolDex on the S& P 500. But it could be the NASDAQ 100 or Treasury bonds or any of the other assets we cover.
To calculate the expected move, we calculate VolDex by 16. [00:10:00] So, for example, with VolDex on the S& P at 22, like it was in the middle of March 2025, the market is saying it expects a daily move of 1. 375%. For an estimate of the weekly move, just divide by 7. 2. The market is saying the S& P is expecting a weekly move of 3. 06%.
And for a monthly move, divide by three and a half. That translates to a 6. 29 % move for the month.
Now you know what VolDex is saying over a range of time frames. But let’s learn more about the history of VolDex values on the S& P to understand what we mean by high, low, and normal.
From 2005, when we commenced calculating VolDex on the S& P, to the end of February 2025, the average daily closing value for S& P VolDex was 17. 12.
The median value was 14. 52. [00:11:00] So it’s fair to say that historically, S& P VolDex is high when it’s above 17. 12, and it’s low when it’s below 14. 52. Now, what if we want some more information?
Well, the 25th percentile value of S& P VolDex during that time frame is 11. 81. So if S& P VolDex is below 11. 81, be fair to say it’s very low.
On the other hand, the 75th percentile of daily closing values for S& P VolDex is 20. 00, 20 even. So when it’s above 20, it’s fair to say that VolDex on the S& P is very high.
How would I use this information when constructing an S& P option trade? The simplest way, and the one that can be very helpful, is to switch between buying options and or option spreads for directional trades when VolDex is low, and selling option spreads for directional trades when [00:12:00] VolDex is high.
Now, I would never suggest selling naked options, regardless of how expensive they are. But selling vertical spreads is a good way to take advantage of a really high VolDex value while defining risk.
Another way to use VolDex that’s appropriate for more sophisticated traders is to build volatility trades. Getting long volatility by buying options or option spreads and then delta hedging when VolDex is very low makes sense, just as selling option spreads when VolDex is very high makes sense..
It’s entirely possible to lose money when doing this, but it has the advantage of buying low and selling high doesn’t mean that an option price can’t go even lower after we bought it or go even higher after we’ve sold a spread, but that’s the way to get started.
A quick example. It’s very timely. S& P VolDex closed at 23. 82 on [00:13:00] February 10th.
That’s well above the average close. It’s well above the median close. It’s even above the 75th percentile close. That doesn’t mean we have to use VolDex to craft a trade, but if you were inclined to do so, you would want a structure that defined risk and made money if volatility fell.
That is, if VolDex fell, even if the market didn’t move. One way to do that would be to sell a put spread. You could have sold an at the money put in SPY, the asset that underlies S& P VolDex, and bought an out of the money put that was not too far away. This would be profitable if volatility fell, even if the market didn’t move.
We’ll watch this trade and see how it would have worked out.
[00:13:47] Exploring CallDex
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Let’s turn to CallDex. What values can we expect for S& P CallDex? Well, the average close is 19. 76, the median close is 17. 18, the 25th percentile [00:14:00] close is just 13. 41, and the 75th percentile close is over 20, it’s 22. 62. Now, how can we use this information?
For example, if you follow us on X, Formerly known as Twitter, at nations_indexes, you’ll know that we were pointing out how cheap CallDex had gotten in February. From February 21st to the 25th, it closed below 13 each day.
You now know that’s well below the 25th percentile. That would have been a great time to buy those out of the money calls delta neutral, or to sell your S& P portfolio and buy those calls in a stock replacement strategy. The first would’ve been very profitable, and the second would’ve vastly outperformed simply holding the s and p.
[00:14:50] Exploring PutDex
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Let’s look now at our third volatility index, and that’s PutDex. PutDex, again measures the normalized price of a one standard deviation, out [00:15:00] of the money put with 30 days to expiration, the average closing value is 67.49. Median closing value, 60.19. The 25th percentile closing value is 47. 49, and the 75th percentile is very high at 77. 86.
Now, sometimes people will ask, uh, one standard deviation out of the money, how does that correspond to delta?
Well, one standard deviation below at the money, for PutDex, would correspond to a delta of negative 16. Similarly, The delta of the options that go into calculating CallDex would have a delta of a positive 16.
Now, how can we use PutDex? PutDex can be used to identify times when selling cash secured puts is particularly attractive. You can find the 30 day put option with a delta of about negative 16. And again, that will align with PutDex.
Now, [00:16:00] if you sell a cash secured put, you have to be willing to buy the shares at the strike price.
If the underlying, in the case of S& P, that would be SPY, if SPY is below there at option expiration. So we consider this more of an investment strategy than a trading strategy, but it can be a very attractive one. Another way to use an elevated PutDex value to help structure a trade is to sell a put vertical spread when it’s elevated.
Again, in that case, you’re taking advantage of the fact that out of the money put options are higher than normal.
[00:16:36] Exploring RiskDex and TailDex
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Our fourth index is RiskDex. RiskDex, again, is simply the ratio of PutDex to CallDex, and the average closing value is 3. 75. The median closing value is 3. 42. 25th percentile closing value is 2. 71, and the 75th percentile closing value is above 4, it’s 4. [00:17:00] 43.
RiskDex tells you how expensive puts are relative to calls. And combined with VolDex, it can give insight into market perceptions and the wisdom, for example, of using a collar strategy.
When RiskDex is low, that means that puts are relatively cheap to calls and using a collar strategy that sells a covered call and uses the proceeds to buy protective put can be attractive.
[00:17:26] Additional Tenors and Underlyings
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We’ve discussed our indexes, and the standard version of each of these uses a 30 day tenor. That is, it assumes 30 days to expiration. But we also calculate other tenors, or times to expiration, for our indexes.
For example, we calculate 7 day CallDex, PutDex, VolDex, and RiskDex. For use when there’s a catalyst looming, something you may want to take advantage of as a trader.
We’ve discussed all of our indexes as applied to the S& P 500 with the underlying of SPY, the S& P ETF, but we [00:18:00] calculate our indexes on a broad range of underlyings, the underlyings that option traders tend to focus on.
That includes the NASDAQ 100, the Russell 2000, treasury bonds, gold, silver, even Bitcoin. And when it comes to single names, we calculate it on a broad swath of single name equities, including NVIDIA, Tesla, Microsoft, Amazon, and others.
[00:18:26] How to Learn More and Subscribe
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Right now You’re probably wondering how you can learn more about volatility and our indexes. And the first way you can do that is to sign up for our free weekly volatility insights email.
You can do that by going to nationsindexes. com.
But if you’re serious about becoming a better trader and making more money, you can subscribe to our real time data and analytics service. We calculate all of our indexes on a broad range of underlyings so that you can trade with information and insight rather than a hunch or intuition.
[00:19:00] Once you’ve subscribed at NationsIndexes. com, you’ll find the custom volatility metrics that provide objective insight rather than guesses or hunches. And that’s how you become a better trader and make more money.
