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

The Weekly Takeaway:

• The S&P 500 rose 1.46% this week and gained ground every day. It closed at 6388.64 which is a new all-time closing high. The index is up 8.62% YTD;
• The Nasdaq-100 rose by 0.90% for the week and is now up 10.76% YTD;
• The market was buoyed by good earnings reports (e.g., GOOGL was expected to report EPS of 2.19 and instead reported 2.31 for the ninth consecutive upside surprise), good news on the tariff front with a deal with Japan being announced, and durable goods orders beating expectations;
• Equities were helped by the 10-year treasury notes as that yield fell by 4.6 basis points on the week;
• VolDex (ticker VOLI) fell by 10.02% and closed at 12.12. It closed at just the 8th percentile of its 52-week range;
• TailDex (ticker TDEX) fell by 6.58% to close at 12.36. It closed at the 8th percentile of its 52-week range;
• CallDex fell by 7.10% and PutDex fell by 9.07%;
• The price action in S&P 500 options was weak across the board in the 30-day tenor as traders want to approach the usually idle August period without being long volatility;
• VolDex on the Nasdaq-100 fell by 7.90%. It closed at the 5th percentile of its 52-week range;
• U.S. Treasury Bond VolDex fell by 4.01% as bond prices rose slightly. CallDex rose 8.81% and PutDex fell by 8.23% in a robust display of bullish sentiment for treasury bonds;
• Bitcoin VolDex rose by 0.73% and remains above 40;
• VolDex fell on all names we cover with the exception of NVDA and WMT. NVDA VolDex rose just 0.11% but WMT VolDex rose another 14.50% as investors continue to worry about the impact of tariffs on China on WMT’s costs. WMT VolDex is up 32.8% since the end of June;
• The Nations Investor Optimism Index rose by 46.38% to close at 58.23.

Equity Index Volatility:

Implied volatility and option prices in the S&P we mixed by tenor this week with all the 30-day measures falling and nearly all of the 7-day measures gaining (only 7-day RiskDex was in the red this week and that was due to 7-day CallDex rising more than 7-day PutDex). 7-day tenors rose because they now catch the next jobs report which will be released on Friday, August 1.

Nasdaq-100 and Russell 2000 volatility measures showed similar price action with 30-day tenors falling and 7-day tenors rising.

We have been noting that equity index VolDex values are near the bottoms of their 52-week ranges and that directional option strategies should avoid being short volatility. Volatility tends to be very low in the heart of summer and while 7-day volatility measures gained ground this week, expect them to collapse once the jobs data is released.

S&P 500 RiskDex rose by 1.51% to close at 2.89. Zero-cost trades that take advantage (e.g., a call spread collar) make sense given this setup.

You can see the 52-week chart of S&P RiskDex.

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 5th percentile of its 52-week range. Nasdaq CallDex closed at the 9th percentile of its 52-week range despite optimism in the space and good earnings results.

Nations Investor Optimism Index:

The Investor Optimism Index rose by 46.38% to close at 58.23.

Other Equity Indexes:

You can see how 30-day option prices for the Russell 2000 were weak while 7-day measures were strong in advance of Friday’s jobs report.

Why It Matters…Friday’s jobs report will mark the unofficial start of many summer vacations as option traders square positions and head out of town. How to take advantage? Look for muted reactions to news that should move the needle in the individual names we cover. And know that while volatility will get very low, it will get very low for a reason.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes finally fell and closed the week at 4.386%. It seems that bond investors are less worried about the impact of inflation as well as the new tax and spending bill. We’ll be paying special attention to yields and option metrics in treasury notes and bonds after Labor Day.

The rally in treasury bond CallDex resumed after pausing last week. RiskDex fell by 15.21% to close at 1.15 as the put skew continues to come out of treasury bond option prices.

Why It Matters…Treasury bond prices move inversely to interest rates and the TLT option market is communicating that bond investors are moving past their fear of a collapse in price.

Bitcoin:

Bitcoin VolDex rose by 0.73% to close at 40.59. While Bitcoin VolDex has fallen steadily from its opening level of 60 when IBIT options were introduced, we’re watching to see if it is putting in a base at 40 as the discernable downtrend has paused for the past 3 weeks.

We continue to look for opportunities to sell bitcoin volatility with Bitcoin VolDex above 45.

Bitcoin RiskDex ticked up slightly but is still below 1.00. We continue to recommend defined-risk trades which would profit if RiskDex rose meaning out-of-the-money put prices rise versus out-of-the-money call prices. These should be done for no net premium such that without a move beyond the current strikes that are 16 delta calls or puts the trade expires worthless. Our rationale is that bitcoin has been acting more like a “risk on” asset and should have a RiskDex value that recognizes the put skew common among “risk on” assets.

Precious Metals:

Gold fell by 0.32% this week. Gold VolDex rose by 0.98% to close at 16.08 and every vol metric in gold was higher on the week.

You can see the Gold VolDex chart below.

VolDex Term Structure:

Term structure for S&P VolDex remains in a very normal, “lower left to upper right” configuration suggesting little concern for stock prices. The far-left value is the 7-day VolDex value and it is now kicked up because it catches Friday’s jobs data.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for 58.74% 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.

Results were strong with 12 gainers and only 2 losers (TSLA and WMT). AMD had another big gain, rising another 6.04% after gaining 13.84% and 6.17% in previous weeks.

PLTR gained 3.44% this week after gaining 14.26% in the prior week.

WMT lost just 1.89% for the week but investors continue to worry about the impact of tariffs on a company that imports 75% of its non-grocery items from China.

VolDex was lower for the majority of names we cover. NVDA VolDex rose by 0.11% and WMT VolDex rose by 14.50%.

It is worth noting that TSLA VolDex fell by 14.99% but TSLA shares fell by 4.12% as the company reported disappointing deliveries for the second quarter of the year. The move downward in volatility is due to the catalyst of the delivery announcement passing.

We continue to focus on combining our volatility metrics with momentum indicators like the relative strength index (RSI).

Last week we pointed out that AMD was one of those candidates. We said, “Thanks to its recent rally it has an RSI reading of 72.72 so it is technically overbought and AMD has a CallDex value of 141.67, the 62nd percentile of its 52-week range. RiskDex is 0.90 so AMD is showing call skew. The 185 strike call could be sold at 1.75 on Friday versus the closing price of 156.99. This is not a recommendation but an example of how we use our indexes.”

This trade hasn’t worked out yet as AMD shares rallied another 6.04% this week but AMD CallDex fell by 2.32%. These options closed the week at 2.62 but they are 7 days closer to expiration and are still 11.13% out-of-the-money. We still believe this is a very good trade setup.

Scott’s Weekly Commentary: