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 but fell on Tuesday, Wednesday, and Thursday and lost 0.31% for the week. The index is now up 12.96% for the year;
• The Nasdaq-100 made another new all-time high this week but it lost 0.50% for the week. The index is now up 16.62% YTD;
• S&P 500 VolDex (ticker VOLI) rose by 0.10 or 0.81% to close at 12.49. VolDex’s closing value is the 9th percentile of its 52-week range;
• S&P 500 TailDex (ticker TDEX) rose by 1.68 or 11.44% to close at 13.01. This week’s close is the 10th percentile of its 52-week range;
• S&P 500 CallDex fell by 9.08% as traders appeared to give up on hopes for short-term appreciation in the S&P 500;
• VolDex on the Nasdaq-100 rose by 5.85% to close at 17.12. That is the 11th percentile of its 52-week range;
• The yield on the Treasury notes rose by another 4.8 basis points and ended the week at 4.187%;
• Most volatility measures on Treasury bonds rose on the week;
• Bitcoin volatility rose with VolDex gaining 11.26% and PutDex gaining 15.78%;
• VolDex on the individual equity names we cover was mostly higher again this week. Only VolDex on BRKB (-7.41%), WMT (-11.56%), and PLTR (-0.86%) fell for the week. VolDex on AMZN gained 19.14%;
• The Nations Indexes Optimism Index® fell by 0.23% to close at 83.47.

Equity Index Volatility:

The S&P 500 made a new all-time high of 6699.52 on Tuesday but then closed lower on the day. Technicians consider that a key reversal and the market fell again on Wednesday and Thursday before gaining a bit on Friday.

Last week, volatility gained despite the S&P 500 gaining ground and that was a prelude to this week’s losses. This week saw VolDex gain 0.81% but CallDex fell as traders seemed to give up on the prospects for upside. Interestingly, TailDex fell by 11.44% so traders believe any selloff will be minor and will not be severe enough to be considered a “tail event”.

RiskDex gained 10.61% as PutDex gained and CallDex fell. RiskDex is still below its historical average and is at just the 27th percentile of its 52-week range.

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.

Results for Nasdaq-100 volatility were similar to those for the S&P with Nasdaq-100 VolDex, PutDex and RiskDex gaining while CallDex and TailDex fell back.

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 5th percentile of its 52-week range and S&P 500 7-Day PutDex at the 6th percentile, buying very short-dated speculative positions remains the logical trade structure.

Nations Investor Optimism Index®:

The Investor Optimism Index fell by 0.27% to close at 83.47.

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 4.187%. Volatility on treasuries generally rose.

Treasury bond options are showing an interesting trade set up with VolDex at the 6th percentile while CallDex is at the 19th percentile. Traders are leaning toward buying out-of-the-money calls in expectation of higher bond prices.

Why It Matters…Treasury bond prices move inversely to interest rates and it is interesting that traders are willing to sell Treasury bond at-the-money volatility so cheaply while paying relatively higher prices for calls. Savvy traders can take advantage by buying at-the-money calls and selling out-of-the-money call spreads in a ratio.

Bitcoin:

Bitcoin volatility rose as bitcoin fell 4 days this week, fell by 3.86% on Thursday, and ended the week lower by 4.79%.

The downward trend in Bitcoin VolDex continues but more tenously now. A rally above 40 would signal a temporary change in the bitcoin volatility regime.

Precious Metals:

Gold rose by another 2.03% this week and made another new all-time high on Tuesday. VolDex, CallDex, and PutDex all rose by more than 10%.

S&P 500 VolDex Term Structure:

Term structure for S&P 500 VolDex maintains a very normal shape and the upward sloping shape suggests there is little fear. Friday’s closing VolDex term structure is in red while the week’s other closes are in black (Thursday) and gray for earlier days in the week.

S&P 500 Option Window:

Option Window® is a graphical display of where S&P 500 option flows were concentrated this week. Any black areas show where buying drove prices higher at constant points of moneyness (horizontal axis) and time (constant 30 days to expiration) while red shows where selling drove option prices lower.

This week’s graphic shows that buying predominated in a small swath of the skew but that selling predominated below 1 standard deviation below at-the-money (approximately 6370) and above 0.5 standard deviations above at-the-money (approximately 6760).

1DTE Options:

S&P 500 1-Day VolDex ended the week at just 6.68. That is just the 3rd percentile of its 52-week range despite an increase of 9.81% on the 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 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 mixed this week. AAPL was the big winner with a gain of 4.06%. AMZN was the big loser with a loss of 5.05%.

VolDex was also generally higher with VolDex gaining more than 10% for several of the names we cover.

TSLA continues to show a substantial amount of call skew meaning RiskDex is below 1.00. This seems aggressive given that TSLA is already up by 31.91% this month. Investors who are long the stock could execute a collar strategy (sell a covered call and use the proceeds to buy a protective put). This is not a trade recommendation and many owners will not want to sell their potential upside, but it is an illustration of the insight our indexes can provide.

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 recently in TSLA.

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

While the buying of shares seems to have ebbed, the buying of puts has not. Some equities still have PutDex levels that invite buying of puts for protection or speculation. META PutDex is at the 12th percentile. AMD PutDex is at the 15th percentile. NVDA PutDex is at the 11th percentile.

While none of the names we cover are technically overbought (i.e., Relative Strength Index above 70), some names are close and as our recent illustration with AAPL demonstrated, stocks which are overbought but still have low PutDex values are ripe for speculative put or put spread buying.

Scott’s Weekly Commentary: