Your Week’s Volatility Market Commentary — Information Is Your Edge
Stocks Make New Highs But Option Prices Are Flashing A Warning
The Weekly Takeaway:
- The S&P 500 closed higher each day this week and ended the week higher by 1.09%. The index is now up 14.18% for the year;
- The Nasdaq-100 also made another new all-time high this week and gained 1.15% for the week. The index is now up 17.96% YTD;
- S&P 500 VolDex (ticker VOLI) rose by 0.74 or 5.92% to close at 13.23. It is unusually for implied volatility to rise on a week when the underlying equity index rises. VolDex’s closing value is the 11th percentile of its 52-week range;
- S&P 500 TailDex (ticker TDEX) rose by 3.04 or 23.37% to close at 16.05. That follows the previous week’s gain of 11.44%. This week’s close is the 18th percentile of its 52-week range;
- S&P 500 CallDex fell by 0.78% as traders continue to be doubtful regarding the prospects for short-term appreciation in the S&P 500;
- VolDex on the Nasdaq-100 rose by 2.16% to close at 17.49. That is the 12th percentile of its 52-week range;
- RiskDex on the Nasdaq-100 rose by 2.76% to close at 2.87. That is the 52nd percentile of its 52-week range signaling a fair amount of worry regarding the Nasdaq-100 on the part of traders. RiskDex measures the relationship between the normalized prices of out-of-the-money puts (PutDex) and out-of-the-money calls (CallDex);
- The yield on the Treasury notes fell by 6.8 basis points and ended the week at 4.119%;
- Every volatility measure on Treasury bonds fell on the week. Much of this is due to the delay or cancellation of the monthly release of unemployment data due to the government shutdown;
- Bitcoin volatility rose with VolDex gaining 6.70% after gaining 11.26% in the previous week. Bitcoin VolDex rose above 40 to close at 40.63. Bitcoin CallDex rose 28.17%;
- VolDex rose for EVERY equity name we cover. LLY VolDex gained 29.90% and META VolDex led the way, gaining 38.97%;
- The Nations Indexes Optimism Index® fell by 5.16% to close at 79.16.
Equity Index Volatility:
The S&P 500 made a new all-time high of 6750.87 on Friday before closing at 6715.79.
Most volatility measures on the S&P 500 gained on the week with the exception of CallDex in both the 7-Day and 30-Day tenors. Interestingly, TailDex rose by 23.37%, more than regaining the previous week’s decline of 11.44%. Traders have reversed themselves and now believe the government shutdown might trigger a “tail event” in the equity markets. TailDex closed at 16.05, the 18th percentile of its 52-week range.
It is worth noting that on Friday, S&P 500 TailDex rose from 15.80 at 3:00 pm CT, when the equity markets closed, to 16.12 at 3:05 pm CT before falling back slightly. Equity index options continue to trade until 3:15 pm CT.
RiskDex gained 8.11% after gaining 10.61% in the previous week. It closed at the 33rd 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 even more cautious than those for the S&P 500 with all 30-Day metrics gaining ground.
Why It Matters…Volatility measures for the equity indexes remain historically low despite this week’s gains, the government shutdown, stretched valuations, and being in a period of the calendar which is often volatile. Nasdaq-100 RiskDex closed at the 52nd percentile of its 52-week range but PutDex is still reasonably priced for hedgers who are so inclined.
Nations Investor Optimism Index®:
The Investor Optimism Index fell by 5.16% to close at 79.16 so optimism, as measured by implied volatility, is still high.
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 fell as some investors sought the safety of U.S. treasuries in, ironically, the face of the U.S. government shutdown.
Despite that, implied volatility on Treasury bonds fell as the most important catalyst of the month for fixed income, the jobs report, was delayed or cancelled.
Treasury Bond VolDex posted its lowest closing level of the year on Friday, 11.05. This should not be ignored by traders with an opinion on the short-term direction of treasury bonds.
Why It Matters…The ability to buy at-the-money Treasury bond options at historically low prices is a unique opportunity given the risks currently present.
Bitcoin:
Bitcoin volatility rose again this week with VolDex gaining 6.70% and closing above 40 for the first time since July 25.
Last week we reported: “The downward trend in Bitcoin VolDex continues but more tenuously now. A rally above 40 would signal a temporary change in the bitcoin volatility regime.”
That has come to pass so the bitcoin volatility picture is getting interesting.
Bitcoin CallDex has also broken its downtrend and it headed higher.
S&P 500 VolDex Term Structure:
Term structure for S&P 500 VolDex was very little changed this week and it maintains a very normal shape and the upward sloping shape suggests there is little fear despite the slight increase in 30-Day VolDex – VolDex across all tenors increased by roughly the same amount. 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.
1DTE Options:
S&P 500 1-Day VolDex ended the week at just 6.48. That is the 2nd percentile of its 52-week range.
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.
Performance for the single names we cover was mixed this week. LLY was the big winner with a gain of 15.92% thanks to positive news about its breast cancer drug and Phase 3 trials for two other drugs. The announcement of a sizeable new contract with the Veterans Administration also helped.
META was the big loser with a decline of 4.46%, fueled by worries about costs associated with AI and the ability of the company to pare expenses during a downturn.
VolDex was HIGHER IN EVERY INDIVIDUAL EQUITY NAME WE COVER this week. META VolDex gained 38.97% as VolDex gained at least 10% for more than half of the names we cover.
Metrics in META were higher across the board with even CallDex gaining as traders reached to buy volatility across the entire skew.
META RiskDex fell back below 1.00 signifying call skew so there are opportunities for those who think META is unlikely to bounce back immediately.
VolDex has started a slow ramp in several individual names. This is interesting and while it is likely too early to focus on short volatility positions, the long volatility positions we have been advocating for have likely worked over the past several weeks.
Note that PutDex rose for every equity we cover with the exception of BRKB (down 1.04%)
We’ll continue to comment during the week via our X account, @Nations_Indexes.
Scott’s Weekly Commentary:
Last week’s action was again confounding – equities continued to rally despite the government shutdown coming to pass. I was wrong when I though the S&P 500 would have to pause given the political environment.
It is refreshing to be back to a point where we can focus on fundamentals and earnings reports with the closing of Q3. I think any earnings hiccups are likely to be focused in a few sectors including agriculture. I believe John Deere is one of the great American companies but it can’t overcome China buying no soybeans from American farmers this year. There is talk of the administration discussing the issue with China’s leadership or offering assistance to American farmers but I imagine the guidance from agriculture companies will be bleak.
In technology, the highest fliers keep, well, flying. NVDA made another new all-time high this week. GOOGL made its own new all-time high 2 weeks ago. AAPL has gained each of the past 3 weeks and is less than 1% from its all-time high.
But the increases in implied volatility over the past 2 weeks are important. First, they reverse a situation where implied volatility was too low by nearly any measure. Second, the increases mean any covering of short volatility positions in the event of a big downdraft in equity prices won’t be as chaotic as if none of the buying had already been done. The world is still short implied volatility but it’s short less than it was at the start of September.
The thing that stands out to me is the incredible bargain to be had in implied volatility in treasury bonds. Regardless of your directional point of view regarding treasury bonds, it should be expressed with positions that are long at-the-money Treasury bond options.
Everyone at Nations Indexes hopes you have a healthy and profitable week.
Scott
