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

The Weekly Takeaway:

• The S&P 500 rose by 3.44% this week and made a new all-time high. It is now up 4.96% YTD;
• The Nasdaq-100 rose 4.20% for the week and gained ground each day. It is now up 7.24% YTD;
• The Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures (PCE), rose by 0.2% in May and by 2.7% year-over-year. This was a little more than expected;
• Much of the rally in stocks was due to easing geopolitical tensions as Israel and Iran observed a cease-fire agreement;
• The yield on 10-year treasury notes fell by another 9 basis points and closed at 4.283%;
• VolDex (ticker VOLI) fell by 18.84% to close at just 13.33. That is its lowest closing level since February;
• TailDex (ticker TDEX) fell by 33.53% to close at 12.70;
• S&P 500 CallDex rose by 20.32% as the S&P 500 option market shifted into “Risk on” mode;
• That move in CallDex helped drive RiskDex down 39.07% to 2.81;
• S&P CallDex is the only 30-day S&P metric that closed above the 13th percentile of its 52-week range;
• U.S. Treasury Bond volatility fell with the exception of TailDex which rose by 2.01%;
• VolDex was mixed to higher on the equities we cover;
• A reminder: 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;
• The Nations Investor Optimism Index jumped 309% to close at 43.17. It has not closed above 50 since January 24th;

Equity Index Volatility:

Implied volatility and option prices in the equity index world fell this week with the exception of out-of-the-money call prices as measured by CallDex. VolDex on most equity indexes fell by double-digit percentages although in the Russell 2000 it fell by just 9.17%.

We have been noting that equity index VolDex values are near the bottoms of their 52-week ranges and that directional option strategies should be long volatility. That worked this week only because of the magnitude of the moves rather than because volatility increased although we pointed out that, “Summer tends to see depressed volatility values so, absent news, it is difficult to see volatility increasing from here. That said, we are not fans of selling volatility at low levels in the hope that it will go lower.”

This remains the case.

TailDex continued it collapse from April highs. We have been noting that, “Traders have been very quick to sell TailDex down from elevated levels.”

With S&P TailDex at the 13th percentile of its 52-week range there is the potential for more downside but we believe the risk/reward profile for such a speculation is unworthy of new positions.

S&P 500 RiskDex fell by 39.07% and closed below 3.00. RiskDex is the ratio of PutDex (1 standard deviation out-of-the-money put prices) to CallDex (1 standard deviation out-of-the-money call prices).

RiskDex is a great measure of sentiment and option skew. You can see the 52-week chart of S&P RiskDex but below that you can see a table of the RiskDex values for the equity indexes we cover. Note the fundamental differences in RiskDex between the 4.

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.

You can see the week’s results for our indexes on the Nasdaq-100 below.

Nasdaq-100 VolDex closed at just the 10th percentile of its 52-week range.

Nations Investor Optimism Index:

The Investor Optimism Index rallied robustly as equity markets made new all-time highs but it could not climb above 50.

Other Equity Indexes:

Option prices for the Russell 2000 echoed those of the other indexes this week with most measures falling but CallDex rising.

Why It Matters…Russell 2000 CallDex has been very cheap during the past two months and we have suggested using these calls to express any bullish sentiment in small caps. This has worked and Russell 2000 CallDex closed at the 24th percentile of its 52-week range, but we think other setups are more worthy of traders’ attention now.

We’ve added the emerging market equity index to our roster of equity indexes. EEM is the underlying ETF we use. These values are available in real time to subscribers.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes continued to fall but this week it was due to decent inflation data and the sense that the Federal Reserve may cut sooner rather than later. We don’t believe that the administration’s rhetoric regarding Fed Chair Jerome Powell is likely to hasten rate cuts.

When Treasury Bond VolDex broke through the 15 level that we were highlighting it continued dropping and it closed at 13.90 this week.

You’ll note that Treasury Bond CallDex gave up its rally and fell by 27.48% as those who were long treasury bond call options thinking the fighting in the Middle East might lead to buying of treasury bonds gave up on the trade.

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…Treasury bonds tend to spike higher when markets or geopolitics turn chaotic. While it’s usually too late to buy these out-of-the-money calls after the news has hit, it is a dynamic traders should be aware of.

Bitcoin:

Bitcoin VolDex has been interesting since it was unveiled in December. It opened then at 61.66 and has fallen steadily giving option sellers a great opportunity. It closed this week at 38.14, down another 5.70%.

Bitcoin CallDex rose slightly on the week as bitcoin volatility continues to mimic equity index volatility rather than that of something more like “Digital Gold”.

If Bitcoin continues to resemble the equity indexes more than gold then Bitcoin RiskDex will rally from the week’s close of 1.10. Trade structures that are long out-of-the-money puts and short out-of-the-money call spreads (we would never suggest being naked short bitcoin call options) and which are done delta neutral, will take advantage of this and we suggest them.

Precious Metals:

Gold fell by 2.87%. All our core volatility measures on gold fell this week. Calls once again fell by significantly more than puts. This remains interesting and worthy of our attention. The result of this move has been that RiskDex is again above 1.00 so gold is displaying a small amount of put skew.

Gold VolDex below 15.00 would likely draw some buying interest.

VolDex Term Structure:

Term structure for S&P VolDex has returned to a very normal shape. This communicates that the S&P option market has little concern regarding short-term volatility. It is interesting given that the 15-day and 30-day measures are likely to catch the action in Washington D.C. regarding the budget bill making its way through Congress.

Option Window:

We have shared this Option Window® graphic in the past and we find it a useful visualization of option prices by moneyness.

You’ll note that traders were sellers of options below the level that is 0.75 standard deviations above at-the-money this week.

This calculation accounts for movement in the S&P so the rally in calls and drop in puts is a function of option prices at each point from at-the-money rather than the movement in the underlying index.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for 57.34% 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.

Every name we cover rallied on the week with the exception of PLTR which lost 4.78%. AMD was the big winner with a gain of 12.14%. TSLA was second with a gain of 9.66% on news of its rollout of robotaxi service in Austin.

VolDex for the names we cover was more mixed with VolDex increasing in 8 names and falling in 6.

Recently we have been highlighting how expensive TSLA options have become and it is interesting that TSLA option prices fell across the board.

Option prices in a number of the names we cover have gotten very cheap.

AMZN CallDex is at the very bottom of its 52-week range. Long call positions make sense.

NVDA CallDex is at the very bottom of its 52-week range. Long call positions make sense.

AVGO CallDex is at the very bottom of its 52-week range. Long call positions make sense.

Other option metrics are available in real time at NationsIndexes.com and there are a dozen other interesting setups.

Scott’s Weekly Commentary: