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Jamie Dimon just made headlines by saying he wouldn't buy the broad U.S. stock market or long-term Treasury bonds at today's prices . But this is not a prediction of collapse. His argument is simple. Investors are not paid much extra for the additional risk they take. Here are the calculations. Every $100 invested in stocks should yield about $4.90 in corporate profits next year, while 10-year Treasury bonds yield about $4.60 in annual interest.
That's just 30 cents of additional expected return for owning stocks instead of government bonds. We constantly see how historically, when interest rates are high, stock markets seem to stall. Er, and vice versa. If interest rates are low, you are forced to go to the stock market to try to make a profit.
So why isn't the market selling off? Because profits remain exceptionally strong, even despite concerns about capital spending. The first reports for the second quarter are exceeding expectations. While many of these stocks are selling off, analysts still expect earnings per share (EPS) growth of nearly 25% this year, and the VIX index is hovering around 20, indicating concern but not necessarily panic .
The question is not whether Dimon predicts a crash. The question is whether that extra 30 cents per $100 provides enough safety margin if inflation remains high, rates rise, or earnings start to disappoint. So today's math test is simple. Is a 30-cent premium enough to justify the stock market risk, or are investors becoming complacent?
Let's check this out in the issue of " Mathematical Options Testing". So, we're on the platform, and, uh, it's a crazy day in the markets today . E-mini futures fell 108 points. The NASDAQ fell 600 points . They are also experiencing a sale. And here's a chart from JP Morgan, whose CEO Jamie Dimon probably likes it.
Uh, the price is $350, the recent high is 350. But I think the real story is in the bonds and notes, when you talk about Treasuries, interest rates and where to find value in today's markets: do you bet on further growth or maybe take a profit on this interest rate capital, especially with expectations of a 25 basis point hike?
I think these graphs are crazy. Uh, ZB is falling to multi-year lows here. If you enter the ZB dollar sign, you can get a continuous ZB price chart. And you see we haven't reached the 109.10 level since November 2023, when we had this big sell-off and then a sharp rally up. Same with bills here. If you enter a dollar sign, you can get a continuous price chart of bills here.
And we haven't seen this level, around 108, since January 2025. So, we are at one and a half year lows for notes and two years for ZB. And yet, we have an E-mini S&P 500 market that, even after today's big sell-off, remains within 300-400 points of recent highs. So I think it's an interesting question.
I think there are a lot of concerns about the earnings structure, and regardless of the numbers these companies are showing, Google and IBM have had good numbers. IBM fell 100 points, more than 100 points from its recent high just a month ago. You see this big price gap down. This happened against the background of pre-report fear .
And they released reports, and today their shares are almost unchanged. Google, on the other hand, fell significantly in price due to the gap. We haven't seen Google at these levels since April, but it's still a big gap down, a six and a half percent drop. This is Google. This is a very big promotion.
Huge market capitalization. 4.23 trillion. This will be a significantly lower figure after this sale. Even Tesla, if I spelled Tesla correctly, fell 53 points, or 14.5%. This is a huge liquidation. And, you know, that's what you'd expect from a company that could have been used as a vehicle to gain access to SpaceX.
SpaceX now has its own ticker. And you see SpaceX trying to move in the opposite direction. But there are many question marks in these markets . Many are asking: will there be enough revenue in the future to cover the huge costs of AI in many of these tech companies? And I think we're starting to see the obvious: the numbers from the previous quarter don't really matter.
Whether it's Google, Apple, Amazon, or Microsoft, they're all reporting next week. It's going to be a crazy session over the next few days. If you look at the S&P and the expected movement until next week, which is until July 31, that's 150 points of expected movement. Earlier this week, that figure was significantly lower.
If we were only looking at the 7-day cycle for this week. So, we see a noticeable increase in expected volatility. Look at the VIX index, it's up 17% today, jumping from averages that were pretty mediocre to almost 20. And once it hits 20, that becomes the limit after which it either goes up a lot or just hovers around 20, after which we see it fall back to the teenage levels.
I think if you want to understand whether the market is laying risks for the coming week, it's worth looking at the S&P or NASDAQ markets. The NASDAQ will be much more subject to skewness because it is heavily concentrated in the "Big Seven " stocks. So I'll focus on the S& P to provide a more holistic view of the market as a whole.
But let's move on to the 8-day cycle, July 31st. This again brings us to Friday next week. It covers all earnings announcements expected next week. And I think that will be a good barometer of the current state of the market. So, 150 points in either direction is still a pretty low number, all things considered .
Today we fell 110 points. I think that's all you really need to know. So let's look at the skew and try to make some sense of it. The S&P is trading around 7400. Let's move on to a put option with a strike of 7200. 200 points out of the money. Let's switch this to the percentage probability of hitting the money.
You can see that there are quite a large number of open positions at this level. 20% probability that the option will be in the money, at a price of $2,400 8 days before expiration. So we won't get a big number- skewing regarding interest rates or implicit interest rates. The further into the future you look when analyzing the S&P or SPY, the more call option premiums you will see.
Even at the strike level, you will see a bunch of premiums on the call options compared to the put side. This is related to interest rates, dividends, etc. So in an eight-day cycle, we won't see this, because eight days is too short to feel the impact of interest rates. Although you notice it a little bit on the call options side.
But let's look at the 7600 strike, 200 points out of the money. And here we have an interesting story. So, let's remove all these other positions that I have on the analysis tab. Let's just highlight this item here and look at the prices. So, 7600 for a raise. This is equidistant. 200 pips out of the money, trading at $6.
But on the downside, 7200, 200 points out of the money in the S&P, is trading exactly four times as expensive . Look at this. Exactly $2,400 compared to exactly $600. This suggests that although these options are equidistant, there is a massive put skew in the S&P for the next 8 days. And I think that explains the situation clearly.
The market is pricing in a rapid downward movement. I think it's especially noticeable today as we see this rapid downward movement. But this is where the fear lies. Fear is not being shifted to the upside as companies report earnings this week and next , simply pushing the S&P to all-time highs. The market is not saying that.
They say we need to be very careful because we see markets reacting negatively to good reports, and a lot of that has to do with capital spending. So, the 7200 put is trading at a price four times higher than the equidistant out-of-the-money call. And let's take a very quick look at the probabilities.
Only a 9% chance of being in the money 200 pips higher, and again a 20% chance of reaching the same level on a decline out of the money. So, the market is pricing in fear for next week. I think it's very interesting, and we're also seeing this in the VIX futures markets . This is something I always pay attention to.
You won't see a 20, 30, 40% sell-off in the S&P 500 unless VIX futures are in a backwardation state. We're starting to see this backwardness creeping in here a little bit . We are not technically in a state of backwardness yet. Backwardation is simply when short-term cycles with the closest maturity have a higher price than more distant cycles.
Now we have a fairly even situation. This is the flattest curve we've seen in the last couple of months, with only a 60 cent difference between Q and U. And the ones behind, V, X, and Z, are all pretty flat. So, buyers beware, I guess you could say that. We have earnings reports coming up for a number of stocks.
Many of those seven " magnificent" stocks report next week in late July, but the markets are taking a huge risk of a sharp decline, with an equidistant out-of-the-money put four times more expensive than an equidistant out-of-the-money call. if you haven't already, and see you on the next edition of Options Math Check.
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