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

The Weekly Takeaway:

• The S&P 500 fell by 0.31% week as trade tensions re-escalated. It is now up 6.43% YTD;
• The Nasdaq-100 fell 0.38% this week despite NVDA, the biggest name in the U.S. stock market, gaining 3.50% for the week and closing with a market capitalization above $4 trillion. The Nadaq-100 is now up 8.42% YTD;
• The yield on 10-year treasury notes rose by 7.5 basis points and closed at 4.423%;
• VolDex (ticker VOLI) fell by 2.46%. It is at the 12th percentile of its 52-week range;
• TailDex (ticker TDEX) rose by 4.38% to close at 12.62. It closed at the 11th percentile of its 52-week range;
• Both CallDex and PutDex on the S&P 500 fell on the week reflecting a general easing in volatility except in the deep out-of-the-money puts TailDex measures;
• VolDex on the Nasdaq-100 fell by 5.46% for the week. It closed at the 10th percentile of its 52-week range;
• U.S. Treasury Bond VolDex rose by 3.62%;
• Bitcoin VolDex rose by 0.97% and is back above 40;
• VolDex was higher on 8 of the names we cover. It rose by 22.09% in LLY despite shares gaining 1.58% for the week;
• 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;
• he Nations Investor Optimism Index fell by 1.80% to close at 44.76 but it closed above 50 on July 9. That was the first close above 50 since January 24th;

Equity Index Volatility:

Implied volatility and option prices in the S&P fell this week with the exception of deep out-of-the-money puts as measured by TailDex. This was a reversal of the price action of the previous week indicating that the option market believes it is fairly priced with no particular bias. That DOES NOT mean the option market is actually fairly priced but just that it believes it is, largely because the summer tends to be a quiet, low volatility period.

All 30-day volatility measures for the Nasdaq-100 fell with the exception of RiskDex which rose by 2.36% because CallDex fell more than PutDex. This was a reversal of the previous week’s price action.

Volatility was more mixed in the Russell 2000.

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. It is certainly possible for volatility to fell even more during the heart of summer but shorting volatility in the hopes that it will go even lower generates a poor risk/reward profile even if it usually works.

TailDex stopped its decline with a rally of 4.38% to close at 12.62. Any level below 10.00 should be bought aggressively.

S&P 500 RiskDex rose by 2.39% but is still below 3.00.

RiskDex is a great measure of sentiment and option skew. 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 10th percentile of its 52-week range. 7-day VolDex and CallDex are both below the 4th percentile of their 52-week ranges but this is a time when options are cheap for a reason. Until tech earnings start rolling in these options will remain cheap and it is difficult to forecast a catalyst which will drive volatility higher. But these are too cheap to sell.

Nations Investor Optimism Index:

The Investor Optimism Index fell slightly on the week but finally managed to close above 50 on Wednesday.

Other Equity Indexes:

You can see how option prices for the Russell 2000 were mixed this week.

Why It Matters…Traders are loathe to be long volatility during the summer so option prices get cheap. The lowest average VOLI close by month occurs in July with an average closing price of 15.30; June is second lowest at 16.21 (October has the highest average close with 18.93 and November is second at 18.47). But it is tough to sell volatility when it is already low and expect the trade to be very fulfilling. It may yield a small profit but an exogenous event could make it very expensive.

We’ve added the emerging market equity index to our roster of equity indexes. EEM is the underlying.

Other Asset Volatility:

Treasury Bonds:

The yield on 10-year treasury notes continued to climb higher as investors worry about the impact of the new tax and spending bill which, as we’ve said before, seems certain to attract bond vigilantes who will be selling and shorting treasury bonds.

The rally in treasury bond CallDex is interesting and worth watching but it has not yet moved far enough from its recent trend to drive a trade idea.

Why It Matters…Treasury bonds tend to spike higher when markets or geopolitics turn chaotic. We wonder if some are positioning for this sort of move as a way of hedging a concurrent decline in equity prices.

We are watching for renewed interest in owning puts on treasury bonds.

We have just begun calculating our metrics on treasury notes with the underlying IEF so we’ll be watching this as well.

Bitcoin:

Bitcoin VolDex rose 0.97% for the week and is back above 40.

Bitcoin VolDex remains in an easily discernable downtrend and we would be looking for an opportunity to sell volatility with VolDex above 45.

Bitcoin RiskDex fell slightly and 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.

Precious Metals:

Gold rose by another 0.65% this week as gold seems to be the first asset moving on concerns about the government’s fiscal situation. In a repeat of the previous week, Gold VolDex rose but TailDex collapsed as traders are understandably unconcerned about a collapse in gold prices. Gold TailDex fell by another 12.33% and closed at just 2.39.

Last week we said,

“For several weeks we have been saying that Gold VolDex below 15.00 would likely draw some buying interest but we now believe buying lightly even above 15.00 is likely to be profitable.”

That worked and it we continue to believe lightly buying gold volatility will be profitable.

VolDex Term Structure:

Term structure for S&P VolDex has returned to a very normal shape from the April disruption and displayed very little volatility of its own this week.

Option Window:

You can see this week’s flows in 30-day S&P options. Deep out-of-the-money puts at the far left were being bought as TailDex confirms. Strike prices from 2.0 standard deviations below at-the-money to at-the-money were being sold moderately in response to the calendar. Out-of-the-money calls were being sold aggressively as the S&P sits near all-time highs and again in response to the calendar.

S&P CallDex closed at the 33rd percentile of its 52-week range so these options are not cheap enough to buy yet.

0DTE and 1DTE Options:

Zero day to expiration (ODTE) options accounted for 60.03% of all SPY option volume this week and that ratio reached 65.25% on Tuesday.

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 mixed with 7 gainers and 7 losers although the gains tended to outweigh the losses.

AMD was the biggest winner with a gain of 6.17% (it had been the biggest loser in the previous week) thanks to an upgrade from HSBC and enthusiasm for the company’s MI350 AI accelerator chips.

WMT was the biggest loser with a loss of 4.03% as investors worry about the impact of new tariffs on a company that imports 75% of its non-grocery items from China.

VolDex was mixed for the names we cover.

The impact on volatility of WMT’s move and the concerns about tariffs was surprisingly muted. WMT VolDex closed very near its lowest level of the last 3 months.

Note the move in WMT TailDex.

Speculative positions that are long WMT volatility make sense although it is likely too late to buy those deep out-of-the-money puts.

We continue to believe that GOOGL is underappreciated given its success with self-driving cars and AI capabilities. But GOOGL VolDex is at the 42nd percentile and CallDex is at the 50th percentile.

Several other tech names have seen their CallDex values creep higher as earnings season opens.

Scott’s Weekly Commentary: