Explaining September’s Whipsaw with VOLQ, the Nasdaq-100 Volatility Index

A chart showing stock price volatility

The last few weeks have provided some very “interesting” trading days and conversations.

By Luke Rahbari, Chief Executive Officer, Investment Advisor Representative

The last few weeks have provided some very “interesting” trading days and conversations.

One question that everyone is always asking, “What is going on in the markets?” And the always popular, “Where is the market going from here?”

The truth is, no one ever really knows the complete answer to either question, but there are market signals and measures we can use to try to get some idea of where some market instruments (stocks, bonds, volatility, indices) are tracking in relation to each other, or opposite correlation. 

If these measures are out of their normal correlations, what does that mean, what has the market done in the past, and importantly, what will the market tend do going forward?

Some of these exercises take a lot of math power and just personal market experience to interpret. I will leave a lot of the complicated math stuff for a later time; for now, I will just try to show some simple graphical and relative level observations, and my so-called experience to dissect the last two weeks in the market.

While there is never a magical indicator that can give us Nostradamus-prophetic knowledge of the future, sometimes there are indicators that can give us increased odds of direction, or in the case of volatility, there are indicators that can give us increased probabilities of the size of the upcoming move in the market.

With the Nasdaq-100® Index (NDX) now being one of the most popular stock market indexes, a good measure to get a feel for market sentiment for the NDX is Volatility of the NDX Index. Volatility, long known as a “fear” gauge, tends to increase as the market becomes more nervous. To that end, the Nasdaq-100 Volatility Index (VOLQ) is a good measure to consider when assessing the 30-day implied volatility of the NDX. In other words, the market’s anticipated volatility in the NDX for the upcoming month.  First, a quick discussion on the NDX before we discuss its implied volatility.

Here is a link to the Nasdaq-100 components.

Here are the top 10 constituents.

Notice if you add up the percentage weights of the top stocks in the NDX: MSFT, AMZN, AAPL, FB, GOOG (class A & C), they make up 44% of the index. Technology companies make up 55% of the total weight of the NDX and Consumer Services is another 25%.

Given these facts, we know that the NDX is a good indicator of the global large cap growth stocks, particularly Technology.

To get an idea of the market sentiment for volatility in the Tech sector, keep two numbers in mind — the level of the NDX (currently 11,100) and of VOLQ (33.50).

Here is a quick link to the NDX site for VOLQ and quick explanation.

VOLQ has a close to 79% negative correlation to NDX.  Meaning, like most volatility-based products, when the NDX moves up, the VOLQ index should be moving down.

This is the normal relationship between volatility and the equity markets. So what happened in the last two weeks with the NDX and VOLQ?

As you can see from the graph below, we had days, specifically at the end of August and the beginning of September, where when the NDX was moving higher, so was the value of VOLQ. Why would that happen? And, what does it signal?

VOLQ chart image

First, take into account that unlike other volatility-based measures, VOLQ is a better measure of the option market anticipated future up or down moves of NDX. It is not an insurance premium measure. Rather, it mostly uses At-the-Money (ATM) options to calculate implied volatility. Most other volatility-based measures give us a better idea of owning Out-of-the-Money (OTM) options as an insurance premium measure. 

As stated before, in most cases, volatility market measures have a tendency to move lower as the market moves higher, however this relationship does not always hold true over time.

In the last two weeks, we saw days when the NDX was having very aggressive moves higher with NDX options in high demand. Remember, options are used to both speculate and hedge portfolio positions. It appeared as though speculative traders were present in NDX stocks and options. As market participants saw these constant options buyers, we started to see the VOLQ index rise parallel to the NDX rise.

In my years of trading options and volatility, when I see an index rising and volatility measures in that index rising, this signals a coming potential downward move in that index. Most recently we saw this pattern happen in January of 2018 and January of 2020.

This is what we had in the last two weeks. Let us recap:

  • The NDX Index starts to rapidly move up.
  • Options volumes start to pick up and there are large call buyers.
  • NDX continues to rise, so does NDX implied volatility; taken together, a potential market trouble sign.
  • This positive relationship continues to accelerate for a few more days.
  • Then, we have the washout. NDX moves lowers, rather rapidly.
  • The NDX has a big move down, volatility starts to subside, and level-out.
  • The NDX starts to move higher and VOLQ starts to move lower.
  • Outcome: we are back in a normalized Index/Index volatility environment.

In conclusion, a great way to assess short term stock market risk is to compare Index levels with corresponding volatility levels based on that Index. Is it in a normal range, lower, or higher? Importantly, why?

Keep an eye on the stock index and the volatility index to see if it broadcast an implied large or small trading range. If the two related indexes begin to move out of a normal observed relationship, it’s reasonable to anticipate potential outsized market moves.



Chief Executive Officer, Investment Advisor Representative

Luke is a managing partner and is responsible for risk management and overall portfolio construction at Equity Armor Investments.

Luke has over 25 years of experience trading equities, equity derivatives and structured products. Previously, he served as the largest independent market maker at CBOE for LETCO Trading (at the time, the largest listed equity options specialist firm in the United States), and became LETCO’s most profitable independent trader within the Designated Primary Market-Maker group. He subsequently managed the largest specialist unit at the CBOE, which, under Luke’s direction, became LETCO’s most profitable unit.

After Toronto Dominion Bank (TD) acquired LETCO in 2002, Luke launched TD’s U.S. Institutional Equity Derivatives desk for listed and OTC client orders and proprietary portfolio trading. The desk grew from zero volume to trading billions in notional value across US single names and indices. During this period, Luke traded with the largest overlay and volatility managers in North America. After leaving TD, Luke established a FSA approved, UK asset manager, Peachtree Asset Management (the asset manager for Peachtree Settlement Funding), managing assets in the structured settlement space. In his dual role as CEO and Chief Investment Officer, Luke was responsible for financial, compliance and business decisions of the unit, in addition to all asset mix, selection and trading of structured portfolios.

Luke is a well-recognized expert in the derivatives industry and has been widely quoted or featured in the WSJ, Reuters, Dow Jones Newswire,, The Financial Times, and Pensions and Investments.

He holds an MBA from the University of Chicago.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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