Interview, Presentation
Hidden Volatility
- Recent market data indicates that individual stocks in the S&P and NASDAQ have exhibited 3.5 times the volatility of their respective indices over the past one to two months, with S&P top 100 constituents showing inverted call skew, a condition historically rare compared to norms where implied volatility is lower for further-dated options.
- Over the last month, the average move on S&P constituent calls has correlated positively with the index, deviating from the usual inverse relationship, while the market has demonstrated asymmetric volatility characterized by 50 bps average rallies on green days compared to 30 bps sell-offs on red days.
- Historical analysis over a 50-year period suggests October is not a major volatility outlier, excluding the 1987 crash and the Great Financial Crisis, though the top 10 S&P names, comprising nearly 40% of the index, are expected to release several AI catalysts throughout October that may influence volatility levels.
- Economic projections estimate a government shutdown reduces quarterly GDP by 0.15 percent per week, with anticipated payback upon reopening; currently, the market is up 20 bps despite the shutdown, with no expectation of significant volatility or a sell-off in the Magnificent 10 stocks.
- Specific option pricing metrics show at-the-money S&P puts costing 2.3 percent to protect spot levels, while a 5 percent out-of-the-money year-end put costs 1.2 percent, rising to 1.7 percent when including a look-back function to base the strike on the highest close between now and year-end.
- A pricing anomaly where further out-of-the-money calls trade at equal or higher volatility than closer strikes is anticipated to offer trading opportunities for fundamental investors holding large single-stock positions.
- Upcoming economic data releases include Non-Farm Payrolls, potentially shifting to next week if the shutdown ends, and Fed minutes, also expected next week, which may provide insight into discussions regarding the September rate cut.