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

The Weekly Takeaway:

• The S&P 500 made another new all-time high this week as it rose by 1.22% to close at 6664.36. The index is now up 13.31% YTD;
• The Nasdaq-100 make another new all-time high as it rose 2.22%. AAPL, GOOG, TSLA, and PLTR all gained more than 4%. The index is now up 17.20% YTD;
• VolDex (ticker VOLI) rose by 6.28% to close at 12.39. It is unusual for implied volatility to rise when the broad market does so well on the week. VolDex’s closing value is the 9th percentile of its 52-week range;
• TailDex (ticker TDEX) rose by 0.89%. This week’s close of 14.69 is the 14th percentile of its 52-week range;
• VolDex on the Nasdaq-100 rose by 4.87% to close at 16.17;
• CallDex on the Nasdaq-100 rose by 9.20% to close at 26.49;
• The yield on the Treasury notes rose by 7.8 basis points and ended the week at 4.139%;
• Most volatility measures on Treasury bonds fell on the week as the Fed’s decision passed however, TailDex on Treasury bonds rose by 22.51% in a sign that traders are bracing for a significant decline in Treasury bond prices;
• Bitcoin volatility fell with VolDex falling 4.52% and CallDex falling 12.74%;
• VolDex on the individual equity names we cover was again mostly higher this week. Only VolDex on AAPL (-0.44%) and MSFT (-0.19%) fell for the week;
• The Nations Indexes Optimism Index® fell by 1.35% to close at 83.70.

Equity Index Volatility:

The price action in S&P 500 options this week was very odd given that the S&P 500 rallied and made a new all-time high. It is unusual for implied volatility and option prices to climb as the underlying asset is performing so well. This is something traders and investors should be watching very closely.

Last week we noted that S&P 500 RiskDex had collapsed in a sign that the market was much more bullish. That decline was arrested this week but just barely as RiskDex rallied 1.50% to close at 3.06. That is the 20th percentile of its 52-week range. These historical metrics (Average, median, 10th percentile, 25th percentile, 75th percentile, and 90th percentile) 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.

Results for Nasdaq-100 volatility were similar to those for the S&P with Nasdaq-100 30-day volatility measures generally rising. 30-day RiskDex is the only 30-day measure that fell and that happened because 30-day CallDex rose by more than 30-day PutDex.

Shorter-term measures of volatility fell with S&P 500 7-Day VolDex falling by 11.69% and closing at 9.85 which is just the 3rd percentile of its 52-week range.

Why It Matters…Volatility measures for the equity indexes remain historically low despite stretched valuations and being in a period of the calendar which is often volatile. Our measures strongly urge avoiding any option structures which are short volatility. With S&P 500 7-Day VolDex at the 3rd percentile of its 52-week range and Nasdaq 7-Day VolDex at just the 2nd percentile of its 52-week range, buying very short-dated speculative positions is the logical trade structure.

Nations Investor Optimism Index:

The Investor Optimism Index fell by 1.35% to close at 83.70.

The index takes into account the current levels of S&P 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 NationsIndexes.com.

Other Asset Volatility:

Treasury Bonds and Notes:

The yield on 10-year treasury notes rose slightly and closed at 4.139%. Volatility generally fell as treasury note prices pulled back into their recent range and as the Fed meeting passed.

Treasury bond VolDex is still very low on an historical basis, closing on Friday at 12.33 which is just the 4th percentile of its 52-week range.

Treasury bond CallDex and PutDex both fell. The closing RiskDex value of 1.06 suggests the market believes risks to the upside and downside are balanced.

Why It Matters…Treasury bond prices move inversely to interest rates and it is interesting that traders are willing to sell treasury bond volatility so cheaply. Savvy traders will take advantage by using long volatility trade structures. They may not be profitable but that is our preferable approach rather than selling volatility when it is already very inexpensive and hoping it will fall further.

Bitcoin:

Bitcoin volatility fell. The 12.74% decline in Bitcoin CallDex suggests traders are much less bullish on bitcoin for the next 30 days.

The downward trend in Bitcoin VolDex continues. The all-time closing low is 32.78, posted on August 8. That’s the important level to watch.

Precious Metals:

Gold rose by another 1.07% as prospects for even lower interest rates helped.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for just 52.0% of all SPY option volume this week. 0DTE volume on September 18 was just 42.7% of the total. That is the lowest daily percentage in recent memory.

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 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.

The single names we cover were generally higher this week. Only AVGO fell by more than 1% while AMZN, AAPL, GOOG, MSFT, TSLA, META, JPM, and PLTR all rose by more than 1%. TSLA led the way with a gain of 7.61%.

But VolDex was also generally higher which is strange as we have discussed.

Two weeks ago we pointed out that “TSLA saw VolDex (at-the-money volatility) and CallDex (out-of-the-money call option volatility) increase while PutDex fell. This played out in both 30-day and 7-day tenors.”

These moves signaled last week’s 12.85% rally in TSLA shares and this week’s 7.61% rally.

Our index values should guide traders and investors to better option structures but they can also signal purely directional moves in the underlying as they have done over the past two weeks in TSLA. This week’s move in TSLA TailDex is extreme and traders should pay attention.

The moves in PutDex in the single names we cover are noteworthy. It seems that investors are buying up shares, driving prices higher, while some are also protecting downside by buying put options.

Scott’s Weekly Commentary: