Nvidia Drives S&P 500 Higher as Volatility Signals Begin To Shift

The rally in Nvidia today lifted the S&P 500, with nearly all of the index’s gains on the day attributable to Nvidia, at least based on my calculations. The equal-weight S&P 500 ETF (RSP) finished the day lower by 30 bps, versus a 72 bps gain for the S&P 500. I was surprised by Nvidia’s move above the $220 call gamma level, which was rather large. However, the $230 call wall held as resistance, and that is the major test for the stock going forward. A failure to push above $230 would likely result in the shares giving back today’s gains over time. Above $230, flows begin to shift, which could lead to the shares accelerating higher.

It is not a surprise, though, that with Nvidia having reported results, implied volatility melted lower across single-stock and semiconductor vol. This is important because, with Nvidia’s results now behind us, whatever was left of the dispersion trade is pretty much over, with only Broadcom remaining at this point. The dispersion index should continue to unwind.

Normally, when dispersion unwinds, we expect correlations to rise, and that has been happening very slowly, with the implied relationship between semiconductor and S&P 500 volatility steadily rising. The one-month implied correlation index has also been steadily rising, but to this point, the move has been calm and gradual. This tells us, first, that the market is not in a position to absorb a macro shock; such a shock would likely result in a pretty violent reset. Yet index volatility remains fairly inexpensive — which is the mispricing.

Second, the more dispersion unwinds, the more likely it is that correlations rise, and the more likely it becomes that, at some point, this feeds back into a rising VIX. Right now, the VIX has been falling even as correlations have been rising.

In the end, though, these are implied levels, reflecting where the market is pricing both implied correlations and dispersion to go. The problem is that it hasn’t actually happened yet. We are just starting to see realized dispersion unwind and realized correlations rise. So, in essence, the options market has skated to where it thinks the puck is going — stocks converging and the index waking up. The puck is just starting to move.

One would think that, from this point forward, realized dispersion comes down and stocks start trading more in line with one another again, allowing moves that the semiconductor AI trade has been masking to finally show up at the index level.

-Mike

Michael Kramer publishes independent macro and options research read across 10+ platforms and by institutional desks.

For institutional partners: research syndication, licensing, and bylined or white-labeled commentary for platforms, brokers, and publishers.

Inquire →

Glossary by ChatGPT

Call gamma level — A price level where concentrated call-option gamma exposure can materially influence dealer hedging flows and the underlying stock’s movement.

Call wall — A strike with unusually large call-option positioning that can act as a significant resistance or pinning level for the underlying asset.

Correlation — The degree to which the returns of individual securities or assets move together.

Dispersion — The degree to which individual stock returns or volatility differ from one another and from the broader index.

Dispersion index — A measure designed to track the relative pricing or behavior of individual-stock volatility versus index volatility.

Dispersion trade — An options strategy that seeks to exploit differences between implied volatility on an index and the implied volatility of its individual constituents.

Implied correlation — The level of correlation among index constituents inferred from the relationship between index and single-stock option prices.

Implied volatility — The level of expected future volatility embedded in option prices.

Index volatility — The expected or realized magnitude of price fluctuations in a broad market index.

Realized correlation — The observed historical degree to which securities have actually moved together over a specified period.

Realized dispersion — The observed difference in actual return or volatility behavior among individual securities over a specified period.

VIX — The Cboe Volatility Index, which measures the options market’s expectation of 30-day volatility in the S&P 500.

Disclosure

This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.