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Yesterday, the central bank announced that the peak had been reached. The ECB said a correction in current stock valuations was likely and warned policymakers that they had less room to react than in 2001. They are not alone. Dalio says it's like 1929 and 2000 . Buffett says the market is a casino. Bearer is bearish on Oracle, Micron and Nebius.
He called them easy prey. And the math here is questionable. This year, hyperscalers will spend about 670 billion on AI. This brings in approximately 51 billion in revenue. The ratio is 10 to 1. In addition, there is the Buffett indicator. Total US stock market capitalization divided by the size of the economy.
Buffett wrote that above 200% you are playing with fire. He just reached 232, which is a historic record. But the VIX closed Friday at 1,490, its lowest since January. Options predict a 4.3% move throughout the month. Everyone expects a crash, and insurance has never been so cheap . So what is it really?
Is volatility misjudged, or does it just seem like a premature reaction? Let's take a look at this in today's edition of Options Mathematics. So, we are on the platform, the Tasty platform. I look at SPX and there are a few things that strike me. First, I have expected volatility imposed on the bottom.
And we see that expected volatility is increasing slightly today against the backdrop of this sell-off. This is the first really significant extension of the sale, I would say. We've been tearing up after earnings reports for the past few months. A few weeks ago, the giants reported: Meta , Microsoft, Apple, and Amazon.
And this was the result of such a huge jump up, 300 points in 4 days in the S&P. That's how we got to where we are now in terms of volatility, with the VIX at low levels. We also fluctuated here, and there were a few days when nothing happened at all . Intraday movements were much narrower than before.
But now we are in a situation where we are at the bottom of the range in which we were trading. We have actually dropped below the recent range over the past week and are now entering territory where there was a breakout to the upside following MAG7 gains. So I think this could create a situation where we slide back through this range, which had no resistance above.
If we roll back through this range, it would be a 300 point sell-off in the S&P. We are already seeing weakness in many semiconductor companies. And, actually, it's all thanks to the fact that Apple rose by almost 2% today. So this market would look much weaker if Apple and Netflix were also falling.
Two of the "Big Seven" rose by 3.5% and 1.6% respectively, while the rest of the market, including the NASDAQ, fell by 1.8%. So, we see a somewhat mixed picture , but I think the market weakness could continue. And we see the VIX rising day after day. A few days ago we were down to a low of 14, and now we are at 16.
And I wouldn't be surprised if volatility increases at least a little. We've talked a lot about the volatility curve, and I think everyone should be keeping an eye on it. But the fact that we have a value of 15 in the Q contract for VIX futures, and then it jumps to 18.23. This is a very steep contango curve.
But after the U contract, we jump from 18.25 to the 20+ level. And, essentially, every contract from V to F to XZ for the rest of the year—they're all in the mid-20s. So, if you look at the curve in order: Z26, F27, G27, and X26— all in the 20 range, and V is almost at 20. So the market is telling us that there's nothing to worry about right now, but we should expect to see 20 in the coming months in terms of expected and realized volatility.
And this just coincides with the midterm election period. So we can expect a lot of interesting things in the S&P and NDX respectively. But if we look at the probabilities, look at the year-end forecasts, the in- the-money interest rates, and some premiums, what is the probability of a move below the level where we were trading before the G7 report ?
And what is the actual probability of falling below the June low, which is around 7235? So, if we look at the end of the year, 7235 takes us below the recent June low. The probability of this is about 30%. $12,000 option for the December cycle. So, that's, let's say, 460 points out of the money. 470 points out of the money to the downside.
If we go 470 points higher from the strike price, we'll be somewhere around 8170. So if we go up to 8170 or 8200, we'll clearly see a significant difference in the valuation of these options. 7230 on the downside is worth $12,000, 8170 on the upside is worth $9,400. And that includes the premium on call options , which reflects interest rates, dividends, and so on.
So we see an even bigger growth premium than usual under zero or lower interest rates. Therefore, in my opinion, the presence of a skewed put option here is quite logical. Especially considering that the risk of the S&P's speed is perceived as being on the downside . I think we will continue to see this increase in value if the market sell-off continues.
Many say that we should expect a correction in the fall months. Traditionally, during this period we see a slightly higher VIX and a slightly weaker S&P 500, but now, due to the S&P's narrow range fluctuations, this is a consequence of the low VIX. It sounds paradoxical, but if the downward movement continues, especially without upward pullbacks, the VIX will return to values of 20 points and the VIX curve may flatten.
Let us know what you think about it , and see you in the next episode of Options Math Check.
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