S&P 500 Outlook Next Quarter

Last quarter I made my predictions for the S&P 500 for this quarter.

The results are in.

The index ended at 2063.11.

I predicted that the S&P 500 had a 1-2% probability of ending above 2060 and below 2065.

And what do you know? I was 100%*1.5% correct!

Here's the probability of the S&P 500 finishing above different values in September.

For example, the median expected value is ~2100! That's not an average, a fat long tail ensures an average expected figure below 2100.

Here are the probabilities of finishing below a certain level.

This chart is generated from calculating 'dual deltas' (change in option price with respect to change in strike) from S&P 500 put options expiring in September.

You can see there's a ~2% chance of a 25+% loss. A little frightening.

These numbers come with a proviso that they are risk neutral probabilities.

A concept which is worth a post in itself.

There is an argument however that risk neutral probabilities are not that far away from the real thing over short periods of time (large well diversified institutions have an incentive to gobble up such low lying fruit) which I find convincing.

With the growing Greek ruckus and other developments over the last quarter, how has the option's market view of the next quarter changed?

Not a whole lot.

Which is interesting, because the Vix jumped a third from 14 to 18 - but VXX and VXZ have stayed relatively flat during that time period and they are more pertinent to our quarterly horizon.