With huge levels of volatility in markets, Brent Kochuba, Founder of SpotGamma, spoke with Scott Nations, Founder, Nations Indexes about their options indexes.
Brent & Scott discuss these innovative options metrics including:
- SDEX – skew index. What is telling us, and how its different than the CBOE SKEW Index?
- TDEX – tail risk index. Why is it suddenly spiking?
- VOLI – a measurement of at-the-money implied volatility. A “more relevant” VIX?
- VOLQ – the Nasdaq “VIX”
NOTE: Below is a searchable transcript of the discussion, with timestamps. As its an automated transcript, please forgive any grammatical errors.
Nations Index + SpotGamma
[00:00:00]
Yeah. Thank you so much for for joining us today. I’m gonna go ahead and share my. And just give a little bit of background I.
Tell most of our subscribers that are here today, and they’re sort of filtering in the room that I’m a big fan of the nation’s indexes. So if, if anyone reads our daily notes, they see we, we often talk about the sd, which is the skew index that you guys have modified. We’re big fans talking about volley, , the tail deck index Tex is another one.
So we are constantly talking about your. Indices and I’m extremely excited to talk to you, especially on a day like today when markets are going crazy and these volatility metrics are are really displaying some important
information.
Yeah. Brent, thank you so much. Uh, The Business Nation’s index has got started from our proprietary option trading expertise.
So I was a market maker. And options on the floor of the CME for 25 years. So during that time, I was one of those crazy guys in a bright red [00:01:00] polyester jacket, jumping up and down and making markets first in options on the treasuries and then options on the s and p futures. And as we, as markets evolved, and as we moved upstairs, we came to realize, We wanted some tools that we could use to help us understand and visualize what was really going on with implied volatility.
And so we started creating the indexes that people know about. Some of them we publish like v skew decks, tail deck. Some of them we don’t publish intra day. And again, we created those to help us understand how markets. For example, Valex is purely at the money implied volatility, close form solution for that.
And as an example, we started that Brent, because whenever we walked back into a trading crowd or or sat back down at a trading desk, the first question that you would ask. Particularly in the, if you walked into [00:02:00] a, a pit or a crowd was what’s the, at the money implied volatility. And you can see that right there mm-hmm.
What’s the, at the money implied volatility. And that’s the way people started building their understanding of the option markets. And from there you could add your own understanding what was going on with the out the money. But really at the money is, is where it all starts. And that’s why we created Valex the way we.
To, to exclude some of those deep out the money options that really have a life of their own. They’re not a true measure of what’s going on with implied volatility.
Yeah. So, so, so if I can interrupt you quickly, I have valex and volume on the screen. So just be clear. The difference between volume and the VIX volume looks at only at the money volatility in the s and p 500, Right.
In the s PX options, whereas the VIX measures all options right, in the in the s and p 500 complex. And so Not, not to jump right into sort of the meat of it here, but since we opened with volley, I just, I’ve been excited to ask you this question. Oftentimes we’ll see people talk [00:03:00] about dividing, say the VIX by volley, or some people subtract or there’s a bunch of different ways.
Sure. You know, why would somebody do that and what’s the value of that
information? Sure. That’s a great question and this goes into really the question of skew. You know, we as option traders or option practitioners, we all love to talk about skew, and that is the fact that implied volatilities change as we move from at the money mm-hmm.
and, and the shape of that, of that skew or smirk. Some people call. Can really be instructive, but you have to be able to measure skew. If you just, if you’re left saying, Well, there’s a little, or there’s a lot, or there’s, that’s not very helpful. So you have to, you have to be able to quantify it. Right. And so to your direct question why would somebody say take VIX minus volley and then normalize that by say, Vic’s, by dividing by Vic.
Why would somebody do that? Because that gives that expresses that quantifies how much. All of those out of the money options are producing. [00:04:00] And so it’s, it’s another measure of skew. It’s a different measure of skew. You know, there’s, we can all agree on the right way to measure implied volatility.
Mm-hmm. , we might, we might disagree on, you know, on the very edges of the calculation. But we all know what implied volatility is with skew. There’s no. Centrally agreed upon way to really measure it. And, and so for example, skew deck, S D E X we, we calculate the implied volatility for the one standard deviation out of the money put in spy.
We subtract and then we normalize by the, at the money vault is really the way it works. And so that’s one, that’s one measure.
Yeah. So, so in this case, when you look at the chart of V divided by vix, which is, excuse me, VIX divided by volley, which is this chart that, that’s on your Twitter feed, by the way, at Scott Nations, is a wealth of volatility information for those of you interested in there, but you see how skew basically, or the, or this measurement right of skew.
Is [00:05:00] down around lows at rival say 2019, certainly before the covid crash. Right. And what’s interesting, and I hadn’t really thought about this until you just sort of mentioned, but the skew deck the sdd is also kind of in that same range right now. Right? It’s also, it’s like they’re measuring essentially the same thing.
Yeah. They’re measuring essentially the same thing, slightly different ways of looking at it. And Tail deck does as well. That ticker symbol is tdx. Right. And that’s the normalized cost of a 30. Three standard deviation out of the money put, and we call it tail deck because that’s three standard deviations out of the money is really kind of the threshold at which people agree a tail event is occurring.
So tail deck is the cost of ensuring your portfolio against a tail event during the next 30 days.
Right. And so do you, do you have a, a general opinion on why, you know, skew is. Is positioned the way it is. I mean, in the last few days here you can see the tail deck starting to [00:06:00] spike. It’s like it’s starting to wake up now.
Like I think some of these uh, you know, central bank scares, particularly probably in Europe are, are waking up, you know, some people wanting some downside protection. But, But do you have a general, you know, view as to why the skew index and stuff like that is pinned sort of towards the low of, of, of
the.
Well, I think that they got low recently because people were relatively un worried. Mm-hmm. Complacent about what was going on. And if they were gonna buy a little bit of protection, they were gonna buy just a little bit, but they were gonna buy at the money puts. So they weren’t preparing for something really serious by, by buying out of the money puts.
And so since there was less buying In that range of like one to three standard deviations below at the money. We saw those, we saw those measures come in, and that actually tells you a fair amount.
Yeah, I think I think you’re, I think you’re completely right about that. There’s been a couple of interest interesting discussions on your Twitter feed, you know about.
You know, different reasons why the, the volley why, why this sort of measurement the skew [00:07:00] measurement VIX over volley is so flat. And, and another good point that was, that was brought up was the fact that when the entire, you know volatility curve shifts higher, right? That, that the wings are sort of not priced as high relative to the belly, so to speak.
Right? So the, so the. Like skew flattens out, or, or the term structure, I guess would be the skew flattens out in that case, which, which makes the wings relatively not as expensive as the, as the, as the belly,
so to speak. Yeah, and you also have to remember that for example, all of our index is skew decks and tail deck.
They measure. Out of the money is that is one standard deviation or three standard deviations out of the money. They measure that by the cost of the, precisely at the money option. Right? So, so we used that to calculate a standard deviation rather than saying, you know, what was the, what was the realized volatility over the past 20 days or 50 days?
Which is, that’s stale. We don’t want to do that. We want to tell, we want to have the market right now, tell us what a standard deviation is. [00:08:00] But that also means. As ley increases those thresholds for one standard deviation outta the money are three standard deviations outta the money they get further away.
Mm. And, and so that, that’s, that’s one reason that you see this phenomenon also. But again, last week everybody decided that that there their pro, their previous. In August had been incorrect. And they really started reaching. They really started reaching for outta the money. Puts as protection.
Yeah.
No one, no one wanted to sell. Puts into the Bank of England going belly up, . There,
there, there
you go. Yeah. So I, I’ll be remiss if I don’t ask sort of, and I, and I know the questions gonna come up. And by the way, anyone that ask questions, please put them in the q and a section. There’s another skew index out there.
Could you comment briefly on why the SDX is different from that other skew index?
Well, let’s, I mean, let’s, let’s go ahead and share it with everybody. I, I’ll say it if you, if you don’t want to, The index, I think you’re talking about is skew.
S K E W is the ticker symbol. Right. And it’s, it’s [00:09:00] calculated by fibo. And it just, I, it just, it really does not measure skew. In the way I, you know, a few minutes ago I said there are lot, there are several ways you can measure skew. Well, S K E W measures it in a way that’s really, really goofy. I don’t know of any practitioners or academics who believe that that’s the right way to measure skew or even a legitimate way to measure skew.
And another problem is skew’s only calculated once it’s calculated at the end of the day, which, That doesn’t do you very much good. So I, I I don’t think I’m beating up on CBO when I say that. I think that they really missed the boat when it comes to the way they calculate this. It’s just not the right way to do it.
I will say again that there, there are more than, there is more than one legitimate way Sure. To calculate skew. F K E W isn’t the way.
Right. And there’s a there’s a, some mentioning string discussion about that. But if you look at basically the math of the skew index, they use a SPX, standard deviation in their, essentially then the denominator of the calculation.
And basically what [00:10:00] happens is that standard deviation rises and falls that can lead to some arant calculations, essentially, as I
understand it. Yeah. And, and, and again, it’s, it’s been a while since I’ve looked. They don’t calculate it until the end of the day, which doesn’t do you very much good. Right.
You know, it’s around noon and the market’s down a bunch, and you’d like to have some insight. One other index I do want talk about real quickly though is Sure. Please, in vq Yes. One uses our VD methodology applied to Indx options. That is NASDAQ 100 option prices and que futures trade. At the cme ticker symbol is V L.
And que options are trading on all of the NASDAQ options exchanges. So I, if you like this methodology and I think that there’s a lot, a lot to like then in the indx world, there is a way to actually. Express your point of view through futures and options.
Yeah, and I, and I know from our talks with the nasdaq, they’re good partners of ours.
I mean, they’re really excited about, [00:11:00] you know, this product and the futures on these products. And, and again, it’s it’s exciting and nice to have this sort of clean measurement of, of Nasdaq.
Well, the, the two indexes, the s and p 500 and the NASDAQ 100 are different. You know, they’re very different and the, and so you need to use the volatility measure that is appropriate for your portfolio.
And Brent, the interesting thing is portfolios are starting to look more and more like the NASDAQ 100. And a little bit less like the s and p 500. And why is that? It’s because, for example, Apple’s done relatively well this year. And so if you own Apple in your portfolio, it’s a bigger portion of your portfolio than it was at the beginning of the year.
And it’s the biggest name in the NASDAQ 100. And so that’s why I say more portfolios are starting to look. The NASDAQ 100,
right? The, the, and apple is the, the biggest beneficiary of capital inflows in the world. I think with the all the ETFs, it’s, it’s in and being the largest constituent of the, of the s and p and the nasdaq.
So it’s the [00:12:00] performance of that stock is really pretty amazing this year, given the kind of carnage across the board, you see, it’s not really all that far off of all time highs. You know, relative to some of these other measurements. So we, we had this, you had this very interesting article.
I’d point everyone to, and I could put this in the chat. This is on the Wall Street Journal. You know, measuring sort of the, you know, this idea of the fear gauge and then again, looking at the spread between the volley and between VIX and, and and volley again. There are some people who, and if you’re comfortable talking about this, you know, the, the VIX is essentially a measure of, of a variance swap, right?
Yep. Or a variance. And so again, could you kind of walk people through that idea and that concept? I think it’s a very interesting one. And, and sort of the difference between what that may actually be measuring versus volley.
Well, we wanna, I’d rather, Yeah. You mentioned earlier that BX uses essentially every out of the money option in the, in the.
Constituent expirations. And that includes a bunch of deeply out of the money [00:13:00] options, a bunch of deep outta the money puts. As long as it has a non-zero bid, it’s effectively going to be in the vx. And, and not just that, but. Those deep out of the money puts, which really are not an expression of what’s going on in the market have outsized influence based on their cost.
That is if you look at the price of that option the further you get from outta the money the more the, the weighted exposure it is in the vx. Mm-hmm. . And, and we consider that to be a, a fundamental flaw in the. Which is why we created Bali. So Bali is a volatility measure, implied volatility measure, and VIX is really a measure of variance.
And without getting too much in the weeds there, there’s a difference in how you might. Build that portfolio to hedge or replicate either of those. But they’re, they have tremendous correlation to each other. They’re very similar. But when they diverge, we think they diverge for important reasons.
And, and it’s, [00:14:00] it’s then when v is by far the more appropriate measure.
Right. Right. That, that makes a lot of sense. And, and The, the discussion around, again, you’ll find some on, on Twitter, some discussions around these sort of different measures. And, and I think for the, the, the trading application of most people, certainly on this call, it, it gets, you know, pretty deeply in the weeds, but I think it’s really quite interesting what the two are actually measuring.
Turning sort of slightly. One of the things that we talked about that, that you do is pretty cool is this term structure the term decks you call it. I know this is something that you’re very excited about. I found it really quite interesting. Can you kind of walk us through what this is and, and sort of why you think it’s valuable?
Sure. And we we do not publish this intro. But if you follow either me on Twitter or you follow the, the company that’s at nation’s underscore indexes you’ll see us post this quite a bit. And this term deck is re, is a, is a single number that quantifies the amount quantifies essentially the term structure.
Mm-hmm. . Now [00:15:00] term structure, the, the version you see there on your screen where. Short dated options are relatively more expensive on an implied volatility basis when those are more expensive than longer dated options. We refer to that, to that as term structure inversion because this is not normal at all.
It normally looks very different. Normally short dated, implied volatility is lower than long, dated, implied volatility. Right. So we’ll get something like this instead, . Yeah, exactly. And so when you see something like this, you know that the world is not, if you will, normal. And so term deck quantifies that number calculates and quantifies that number.
And if you go to our. And under the tab index values, you can see the historical values for term and actually all of our, There we go. Over to the right one nation’s index values. And you’ll see there if you click on that and you’ll see [00:16:00] that you can download and we try to update, update those monthly.
They’re more likely to get updated quarterly, but that’s a way that people can actually see those values and understand what is normal. And if you actually go to my Twitter feed, penned to the top of my Twitter feed you’ll see, there we go. You’ll see there we are, you’ll see an animation of term structure and that that blue line is what is normal.
That’s the average. And the red line is what was going on in the middle of September, but that blue line is the average shape. Of S p y implied volatility term structure.
This is a very soothing music for what’s gonna ultimately end in a pretty nasty crash. Well,
well, yeah. We have a neat team that does that, that puts that together.
I’m not a very musical person, but they thought that would be really interesting. And so that is we, we think that that’s a really interesting. [00:17:00] Of, of looking at term structure through time so that you can see what’s normal, but you can also see what happens, say in, in March of, of 2020 or, you know, February of 2018 when things got really crazy.
That this is, that is
pretty neat. So a lot of us are probably familiar with looking at maybe like Vic Central, right? And you can see the VIX curves and, and term structure. And I, and I like this because of the fact that that Vic’s term structure can do some really weird things around exploration as sort of the future and the index kind of sync up.
. And what I like about this is the, the exploration term’s a little bit shorter. And so, you know, do you have that same effect where the, the expiration’s gonna affect kind of the, the starting edge or the leading edge of this, of, of this measure. You know, it’s not
so much the expirations because again, we use t y options and there are enough there are enough expiration dates that, that expiration is not really a problem.
What you’ll really see sometimes our catalyst, catalyst will really get this outta whack. We saw that just before the last fed meeting as [00:18:00] an example, that the, the, the term structure will get a real weird kink to. . And that’s because everybody wants to own options of a certain maturity to catch the catalyst, right?
I guess the, the way I should have stated is that you’ll have the settlement issue in, in that will reflect in the Vic’s term structure there. Like when you look at, at Vic Central, right? Cause the index and that front month feature have to settle together. And I think that right can skew the, the data there a little bit if you don’t kind of account for that.
And then there’s also oftentimes weird things where there’s an extra day, right? In the, in the VIX calendar or whatever. And, and that. Re lead to some weird kinks in that curve that aren’t necessarily related to like the event the event vault kind of stuff you’re talking about. Well, and, and part of the problem is that, to your point, is there are a, a finite number of VIX futures expirations.
And for our purposes, there’s, there’s an essentially an infinite number of s p y option expirations. And so we, we rarely see that sort of a problem. And term, [00:19:00] term decks is just a if you go the, the, the fact sheet is on the. . And so if you go to Volatil, there you go, click on that, you’ll see the fact sheet.
And yeah, they’re at the bottom right on the, on the second page. You’ll see the predictive value that term decks can have, and term decks is really just a, again, a quantified. Measure of the slope, the best fit slope of that term structure from seven days out to 360 days. And it has a tremendous amount of predictive value about what’s gonna happen in the s and p over the next 20 trading days.
And what, so in sort of the most extreme of events, like, you know, March of 2020, I mean, How high have you seen this skew measurement read? Like what, can you, can you give us kind of rough sense of backwardation maybe like where the front would be, you know, versus stuff that’s farther out?
Yeah, that’s a, that’s a good question.
I don’t, not off the top of my head. Again, if you, if you’ll play that video all the way through, you can see I
would Yeah, they do give it to us there. Yeah. [00:20:00]
Yeah. But, and we don’t need to play it now cause it will take a while, but I will, That, that Well, we’re close. I would bet that seven day number in March or April of 2020.
There we are. I’m gonna bet that guy . Yeah, I’m gonna bet that guy up to about 90 at some point. Yeah, that line
right there is about 90. I don’t know exactly where I snapped it. So it’s the time series versus the average today. So I must have just missed sort of after the. Powell came out and saved the day, or opex saved the day or however you wanna look at it.
I bet you that seven day value got to, got to 90, if not close to a hundred and that, you know, that makes sense. It looked like it. It looked like the world was coming to an end and. Who knew how that was gonna work out. And so you can, you can see the extremes. Yeah.
Yeah. That’s that’s really quite fascinating.
And it’s nice you can download this data. People, we find that people just love that downloadable data where they can play with things themselves and and get used to all the different. Flavors the market. So, and, and I guess also on this point, one thing I, I, I should bring up is topical is [00:21:00] in the next month there’s a CPI reading on ten three.
There’s a, I assume a cast of, of earnings over the next two weeks. Then we have the ECB on 10 27, the F OMC on 11 two. The Bank of England on 11 three, I think there’s an election in there somewhere, . So in the next say 30 days, this chunk of the curve there’s not a whole lot of reason for this to deflate or, or to to really shift sharply into tangle in my view.
Right? I mean, I know there’s a little bit more of a, of a forecasting exercise and. , but how do you sort of look at that? How do you think like a vent vault may factor into holding this up versus, you know, kind of real fear in the market like we have now?
Yeah, that’s, that’s a great question. I think right now it’s clearly and when we’re done, I’ll post the absolute most recent value on my Twitter feed.
And the, it will be up to the minute. Right now everybody is buying all these short dated options because they’re afraid. And let’s face it, people buy short dated options because they’re afraid. That’s, but right now we’re afraid that, you know, the market’s gonna be down another a hundred points tomorrow or the next day or whatever.
But you’re [00:22:00] too, you make exactly the right point that people are gonna be afraid of different things just before the next CPI or PPI release. Probably gonna be afraid of different things the first week of November. So I, I, I would be very surprised if this got back to normal. Can tango where?
The, the seven day implied ball or the seven day Valex na number was very much lower than, say, the 30 day or the 60 day. That would really surprise me because that would be a sonic complacency. And, and we, as investors, we have pretty short memories. We don’t have memories that are quite that short. So if that were flat before the next catalyst, I wouldn’t be surprised.
As long as the s and p is kind of moderated, its. But again, I would, I’d be really surprised if, if we had that big typical swoop lower left to upper right sort of peak.
Yeah. Like a, a real flush or release. And, and I guess sort of related to that, something that just kind of popped in my mind here on the tail deck index.
I mean, this has been a, a pretty substantial move up. But, but these moves are [00:23:00] probably relative, right? I mean, we, we shouldn’t really anchor the, the value here to this value, you know, back in December of 2021, right. , is it, is it the relative move that occurred that that’s a big signal here? As opposed to sort of like the, the absolute level on the chart, if that question makes sense.
Yeah.
No, I think that, I think that’s fair. It’s lemme put it this way, it’s easier to go from, for, for tail decks to go from 10 to 15 than from 50 to 75. Right? And, and, and so that’s, I think that’s what we saw was that. Those puts got very cheap on a relative basis, given all the uncertainty. And again, it’s easier to go from 10 to 15 to 50 to 75.
Right.
And so do you have a, a sense, I guess kind of the same way of the tail deck and I suppose we could just download this data and do a little back testing playing around, but, but do you have a sense as to. , you know when, when you get this type of a magnitude of a move, right? It’s kind of like, you know, peak bearishness, so to speak.
Or or the idea is that, you know, the puts or like Vick’s going to 80, right? Like, well, no one’s [00:24:00] gonna necessarily wanna buy puts at 80 because they’re probably never ever gonna pay off. Of course, if VIX goes to 200, then, then of course it’ll pay off. But you get kind of understand what I’m getting at that, that this is a measurement of.
Sort of extreme fear, right? In the same way that, that, that maybe a volley spike or,
or Vick spike would be, Well, I, again, going from 10 to 15 is a big move. It’s a 50% move, but I, I still don’t think at 15 tail deck is particularly elevated. Mm-hmm. , I mean, these, these, somebody is bidding to buy those options.
Mm-hmm. those deep outta the. S p y puts, that’s why, that’s how it got up there, right? And so somebody’s willing to pay that for those. I I, I don’t it’s a big move, but I, I, I would have a tough time getting very fired up about tail Exit 15.
I, I don’t know why. I don’t know if this is make any sense, but off the top of my head, I said the volume to, to tail X ratio.
I’m sure if that the
information or not. Well, Well, but this does kind of [00:25:00] show the fact that for a long time if people wanted to buy options, they were gonna buy at the money options. They weren’t gonna buy deep out of the money puts.
Right. So it’s interesting all the different ways you can adjust all this and, and play around with it.
Yeah. Quite fascinating. So well we should open up for some questions here. If you guys wanna enter some questions, please use the key q and A section. And we answered a couple, kind of as we were going. I was checking those off some things we addressed. So please pop them in the chat, in the chat section there.
You also have a book that you wrote. I don’t know if you want to talk on that for a second. I personally have, I, I gotta order this one. It’s called the Anxious Investor. Can you just, you wanna just give a little background on what that is?
Brent? Yeah. Thank you very much. I’ve actually been able to publish four books.
The Anxious Investor is the most recent one. The one in 2017 was a History of the United States. In five crashes. That was a general interest history of, of the modern stock market crashes, but the anxious investor came out in April. The timing is fortuitous. I wish I could say I planned it this way but the, the anxious investor is an analysis. I wouldn’t even say [00:26:00] analysis. That’s too high. Polluting at work, the anxious investor looks. All of the behavioral biases. I talk about 15 specific ones in the book, talks about the behavioral biases that investors display whenever they’re dealing with money.
And Brent, the problem is that of the 15 biases that I talk about in the book, None of them, not a single one improves your investment returns. Mm. Everyone is damaging. And so I, in, in the scope of talking about those 15, I look at ’em through the context of three famous stock market bubbles and collapses.
And so the goal is for people to, to see maybe themselves a little bit in what people were doing. And they might say, You know, I don’t fall for that bias and I don’t fall for that bias. But boy, this one that he talks about, that’s me. I rec, I recognize myself there. And so that when people start are making investment decisions, they, they [00:27:00] can focus on the biases that they’re most likely to fall for.
And the problem is that they. So many of ’em are just natural, just natural the way we are, the fact that we’re human. Yeah. You, you think that, you think you’re doing the right thing. And I try to show in the book without beating up people that, that your, your biases are, are not your friend. Right. So,
I, if you had to pick sort of one that you could think of that in this environment where, you know, there’s a lot of fear and.
Starting out clearly get, I mean, people are buying those, that tail risk. Right. So if you had to sort of focus on one bias, is there one you could say right now that, that people are probably extra, sort of heightened? The, the risk of falling to that bias is extra heightened?
Yeah. There, there are, actually, I’m gonna talk about two because they’re very similar.
They’re related. One is recency and the other one is availability. So recency biased is our, is our tendency, our human tendency to believe that whatever has happened recently is normal. And we know that what has [00:28:00] happened recently in the stock market is not normal. Mm-hmm. . But we think it is. And so we think it’s gonna continue.
And so people pull the plug and sell because they just can’t take. They, they just can’t take any more pain and availability is the same sort of thing. It’s the tendency that people have to believe that whatever is available to memory whatever they can recall is normal. Mm. And we know that that’s not the case.
If you can remember it. And it happened more than say, a month ago. That is almost certainly not normal. But, but that’s what happens. And, and as an example of recency I, I use some mutual fund equity, mutual fund data from February and March of 2008. And those months saw the biggest equity mutual fund outflows in decades.
So that means people sold at the absolute bottom and then if you use that same flow data, we know that they didn’t get back in right until, until years later. But they thought that, [00:29:00] well, you know, market’s been down a bunch. I think that’s gonna continue because it’s. And as I also point out in the book, there’s no such thing as momentum in the stock market.
If you calculate the auto correlation of the Dow going back to, to 1896 that number’s effectively zero. There’s no correlation from one time period to another. Hmm.
And I, I think that’s particularly interesting. I, I happen to just think about, you know, realize volatility years we’re talking about realize vault, and I’ve been talking a lot about the fact.
If you look at realize volatility this year in the s and p, it’s higher. It’s, it’s holding at a sustained level that’s higher than at any point in the last 10 years. Like, yeah, we have like a few episodic spike, so to speak, but the sustained volatility that we’ve experienced this year is almost become, I think, in a way normalized to people.
Right. And I think the market adjusts that in the same way that I think traders could as well. Like now we’re all just used to the fact that markets move around one or 2% on any, you know, on a given basis and. And, and I think [00:30:00] adjust that in, in a weird way. And I, I think eventually it’s gonna hurt people because they may be, you know, may pay too, pay too much for options or else it’ll be this weird transition period that I think throws a lot of people off.
Yeah. One thing we do know about volatility is that, is that it’s hetero didactic, and that means that, Markets are more volatile than normal for, for a period of time, and then they get less volatile than normal for a period of time. And that is that that volatility bunches we don’t see a really, really volatile day ed by a very.
Esent day. That’s just not the way volatility works.
Right? Yeah. You definitely get this, this clustering effect oftentimes, right? But here that, that, that the bar has sh like it’s a, it’s a new lower bound, so to speak. Yeah. Which, which is, which I think is really quite interesting. Jay here ask a quick question.
He said can you provide a one or two trading use cases here in some of your indices? Is there something. You could say, Hey, this is a common thing. I mean, I know you mentioned before that, that that [00:31:00] Tex gives a lot of interesting information. If you kind of back test that, back, test that. But is, is there another metric that you look at that, that may be a good leading indicator of market movement or, or something to help people trade?
Well, this, this term structure, and again, we don’t provide term structure on a, on an intra day basis, but when term structure or term deck gets very negative mm-hmm. , that is when the, the best fit. Slopes strongly from upper left to lower right, that does tend to mark lows in the market, lows in the s and p, and you can see some of that on that term deck fact sheet.
So that’s, that’s one way I would think about using it. Another way is is to use que derivatives futures and option to hedge a portfolio that looks a lot. You know, the NASDAQ 100 mm-hmm. . So there are three expiration months that are available in both futures and options. And the final thing I’ll say is that, and this is I think is probably the, the most interesting trade, although compliance is gonna make me say this is not a trade recommendation,
So we pay [00:32:00] particular attention to the basis for vq. Versus the basis for Vs. What’s the basis? It is the index minus the future’s price. And so as an example VQ futures are trading above the index level. While Vic’s futures are trading below the Vic’s futures level. And so that’s one way that you can take advantage of, of that, that basis.
I just did that the wrong way. If I did I wanna do some que, There we go. So this is essentially that basis. I’m not sure if Trading view is probably not the best platform view that’s spread on, but that’s, that’s quite interesting. So look at the basis again. The, the, the que and, and the que futures versus the Vix and the Vix futures.
Exactly. And, and given that que is earlier today, that spread was to almost two points. So que [00:33:00] futures were about 80 cents above the index. Vic’s futures were about a dollar 20 below their index, and so the obvious way to take advantage of. Is to sell que futures and buy Vic’s futures. The, the, the the multiplier in que futures is only a hundred dollars.
So you do have to do 10 que futures for one Vic’s future. But, but, but that’s one way to take advantage of the fact that both of those futures contracts are going to converge on the index value at expiration. And they both, they both settle at the same time on the same Wednesday. That’s 30 days before.
The next month’s expiration. Yeah.
That that’ll loan. The fact that the mul multipliers is smaller, I think is, is probably a big attract for a lot of people as they get more used to sort of, of trading the, the volatility environment. Speak, excuse
me specifically. Yeah. Futures the ticker and they trade at the cme, Ticker symbol is blq and the multiplier is a hundred dollars.
So if you have a point of view [00:34:00] and you want to kind of get your feet and the markets are always 10 cents wide. Then there’s a way to, to express a point of view and do it in a reasonable size. And do you
have a static sort of of relationship or ratio? If, if you’re long, say a portfolio of nasdaq, let’s just say the Triple Qs How many futures you want to consider, or do you have a sort of a, some, some way to advise people on the number of futures they would want to consider buying que futures if they wanted to hedge out the volatility that of, of their, let’s say, you know, Q qq equity
position?
You know, it’s a, it’s a good question because, because Q is a product of another company I’m not certain I want to go
there or if there’s an equity notional maybe amount.
Yeah. You know, I would if you look at the que fact sheet on our website, you’ll see the correlation value Got it. To NASDAQ 100.
And that’s probably the that, that’s probably how people should approach that.
Okay, so that would be the center box here
up now volatility indexes. So one big tab to the left. There, there you go. Look at the [00:35:00] que ticker or the que fact sheet and you’ll see there what the historical correlation is.
Ah, perfect. So there you go.
So that’s how you can calculate some hedging ratios if you’re so interested in
that. Yep.
Yep. And then we’ll, we’ll field one more question here. I know you’re a busy guy, so we’ll field one more. I really wanna thank you for your time. Paul here asks, How might an option seller think about some of this information or some of the ways to take advantage of it?
I don’t, I don’t know if, if there’s something that you would really necessarily change based on, You’ve already given us a few tidbits in this, but I dunno if there’s something in specific. I mean, we have a lot of people and obviously selling premium is, is really quite a popular strategy out. You know, if this says anything about calendars or other ways you could think about maybe wanting to sell sell options in, in a portfolio.
So say, for example, maybe what SKU is telling you or, or something along those lines.
Well let’s, let’s look at ball Q first. The, the general level of, of VO. Will tell me whether or not say selling que options makes a lot of sense. I would never sell those if ques at [00:36:00] 10 mm-hmm. Or at least I wouldn’t sell upside calls.
Certainly because that doesn’t make too much sense. It’s ques never gonna fall much below 10. It’s just not, we don’t, Volatility has a lower bound and it’s mean reverting. I, I would say this. In a situation like that, when, when Voq is relatively low, then then selling call spreads.
Makes sense. That is we’re gonna collect some premium, but we’re gonna limit our upside. And you know, we get into a situation like this where ques at 35 or so are actually quite a bit higher. Could they then, then I still think that selling call spreads makes a tremendous amount of sense in a volatility product.
It’s just a good way to collect premium define risk. But you know, recognize. Volatility is mean reverting, and it’s not gonna stay at 35 forever. Right.
And I think that that also sort of dovetails with this backwardation is is hard to sustain this in, in my view.
Because the relative expense of these short term options they, they gotta come down. And so I think oftentimes considering selling. You know, maybe put spreads in this environment. [00:37:00] Again, not investment advice, but to me that’s just something to think about because even. You know, we sustain this longer dated level of vault, say 27 90 days out or something.
You can get a real, very quick flattening right of, of this curve. Which would represent, you know, the, the, the decline inly volatility of short term spiders,
right? And it, you know, so calendar spread in bulk queue options would be another way to take advantage of those same sort of, So if you were to sell you know, the October 40 call and by the November 40 call, well, you’ve defined your risk, but you’re also taking advantage of, of the, the fact that.
Everybody wants short dated and nobody cares too much about longer dated a a talent. Doing a calendar like that again would be a way to define risk by taking advantage of all those situations.
Right. That, that makes a lot of sense. And, and those and the que. Futures have options listed on them, right?
So if you, Paul’s asking as well, you can like, can think of so much, just type back slash vlq and I’m able to bring up the, [00:38:00] the v q index and is that how I get at those options as well?
Back, Back slash blq will bring up the futures. Okay. And the, the ticker for the options. Is V O L Q. So like in index, just like in the VIX world the, the options and the futures are both derivatives on the index.
So the options are not options on the futures, they’re options on the index. I get it. So back, back flash, VBL Q for the futures. And back slash and well, not back slash and v lq for the options. And that’s on Thinker Swim. Yep. I
was just able to put, to pull those up myself. So, Yeah. So that’s great. Well, Scott, you know this has been a wealth of information.
I really appreciate, It’s really cleared up some of, some of the thoughts and ideas I’ve had around how to use some of your different products and also my, to some new things. I’m definitely gonna be downloading detail decks excuse me, term decks, data and, and playing around with that. Anything else, you know, people can get ahold of you at Scott Nations.
Anything else that people should know here before we sign off? Yeah,
just the [00:39:00] best way for people to get a hold of me is through Twitter. Actually. I’ve, I’m generally really, really good. Interacting and answering questions. That’s just a great way to get hold of me is, is through Twitter. I love to interact with people on Twitter and it’s a good way for us to share charts of what’s going on or thoughts or that sort of thing.
That, that’s great. Thanks so much. And we’ll be we’ll be pushing this video out to YouTube so everyone can watch it up there. And then also breaking into some smaller pieces that, you know, specifically talk about some of these different features. So all that for everybody listening will be pushed out in the next couple days.
Well, thank
you Brent. Thank you for having me.
Yeah, it’s been great talking to you, Scott, and we’ll talk to you again very soon.
Thanks so much. Take care.
