Transcription
The S&P just rallied 19% in 9 weeks. Deutsche Bank says moves like this have historically shown up before major market crashes, but the data isn't that simple. Tom Lee says the S&P could reach 7,700 before a 15 to 20% correction into October. We're already at 7,600.
Um, the second is the US is one of the biggest exporters of the most important tool in the next 10-15 years, which is AI products. And that means we are a net essentially exporter of a high-value product.
Meanwhile, investors have poured $27 billion into tech ETFs since March, while nearly every other sector has seen outflows. Here's the debate. Deutsche Bank says this type of surge is a warning sign. Charlie Bilello's research shows that the biggest rallies since 1950 have actually led to above-average returns over the next 1 to 5 years. The key difference, most of these rallies came after recessions. This one is a tariff/war relief bounce. With the VIX sitting at 15, is the options market underpricing a correction, or are investors about to chase another leg higher? Let's take a look in today's episode of Options Math Check.
So, I've got the crude oil futures market pulled up here, and you might be wondering, well, why are you talking about crude oil? You were just talking about the S&P 500. I think when it comes down to catalysts that could bring this market to the downside, I think crude oil is at the top of the list. Uh, we saw this go into a steep backwardation and massive price hikes into the uh, war period we have a few months ago, and that was where the market was selling off pretty aggressively. I think today you're starting to quietly see crude oil continue to price higher. We were in the mid-80s, now we're sitting at 96, and this is going to be the third or fourth day in a row where we're posting a green day in crude oil. But most importantly, looking at this backwardation here, it's starting to widen out again. We got as low as like two to three points. We're sitting at just over three points now between the N and the Q contract, but this is what I'm looking at. These back months here in uh, late December, January, early months of 2027, these are picking up a lot. Like, these prices were around 75, 76. Now the furthest out cycle is at 76 and a half. We're looking at 77, 78, 79, 80. End of the year, we're still pricing in an 80 uh, crude oil price at the 196-day mark. So, we're seeing the tail end of the curve of crude oil pick up, and I think that is going to uh, play through higher cost of goods, higher inflation, things like that. Crude oil is not just uh, gas at the pump. It's not just jet fuel. It is many, many other things. Uh, so, I think this could be something to watch. If you see crude oil prices rally.
I think another thing that's interesting is volatility. Volatility has been really low. We've seen the VIX in the mid-teens here. Volatility futures are in a pretty steep contango. However, they're starting to flatten out just a little bit. We had like a 2 and a half point contango uh, between the M and the the N contract, but now you're seeing the between the N, the Q, the U, and the V, they're kind of flattening out. There's only about a point and a half, two points of difference here uh, between these contracts. And if we continue to see the market sell off, especially in some of these big tech names that have sold off recently, if we see volatility flatten out and potentially go into backwardation, for me, if we see backwardation in the vol futures market, that is the green light for a potential market sell-off. You just don't typically see market sell-offs in a big way. I'm talking 10 to 20% to the downside without volatility going into backwardation.
So, looking at SPX, again, we're basically at 7,700. Uh, that was a lot of analysts' year-end calls, but just looking at the end of the year in SPX, we've got a 750-point range here, and I'm interested to see if this market has changed a bit considering we're down half a percentage point in the immunes right now, but we were seeing a higher probability that we would go up to like 8,000, 8,300 than to the equidistant downside. So, let's just take a look. Like, what does the 1,000-point out-of-the-money option market look like to the downside by the end of the year in December? We've got a 19% probability being in the money at the 6,500 strike. That's about 1,000 points to the downside. And the probability of touch on this option, which is getting down there anytime during the course of the options expiration over 197 days, is about 40%. It's about twice the in-the-money probability.
Now, if we go to the upside and take a look at the 8,500, 8,550 level, you're going to see an interesting turn of events. So, we were looking at this earlier couple weeks ago, and we actually saw a higher probability of a market move to the upside and pretty decent premium here. Now, with the market sliding a bit, you're seeing the premium kind of come out of this call side here. Only $7,500 in terms of premium to the upside at the 8,500 strike. But, you look at the downside, and the tail risk is clearly priced in here. $11,000 to the downside, slightly higher probability. So, I think things could be looking like they're starting to turn here. Again, a couple weeks ago, we saw a higher probability to the upside. The market was just climbing higher every single day. A lot of tech stocks, hardware names, you name it. Some of these stocks that I've never even talked about for years. Dell, IBM, these things are ripping higher, but they are selling off quite a bit today. Microsoft is down like 60 points from the high over the last 3 days, so we're seeing some selling in the market and we've had such a crazy run-up to the upside. This could turn into kind of like a profit-taking selling excursion where when people are selling out of longs, that creates downside pressure, especially if the masses are doing it.
So, keep your eye on the crude oil markets, keep your eye on volatility, but as it stands here, really interesting to see the move uh, being priced into the downside or I should say the tail risk being priced into the downside. It seems to be coming back just a little bit with a slightly higher probability of being in the money and relative to the upside. Uh, we're looking at 1,000 points on either side, but yeah, let me know what you think in the comments below. Please like this video, subscribe to the tastytrade channel, and we'll catch you on the next Options Math Check.