Tom Lee Says This Could Be the Best Market Run Ever. The Math Shows a Glaring Flaw

Key Concepts

• SPX (S&P 500 Index): The underlying asset analyzed for market movement and volatility.
• Put Skew: A market condition where put options are more expensive than equidistant call options, indicating a higher perceived risk of a downside move.
• Probability of Being In The Money (ITM): The statistical likelihood that an option will have intrinsic value at expiration.
• Probability of Touch: The likelihood that the underlying asset price will hit a specific strike price at any point during the option's life.
• Velocity Risk: The risk associated with rapid price movements, often reflected in option premiums.
• AAII Retail Sentiment: Data tracking the bullish/bearish outlook of individual investors, used here as a contrarian indicator.
• Interest Rate Premium: The component of an option's price that accounts for the cost of carry/interest rates, which becomes more pronounced in longer-dated options.

Market Analysis and Sentiment

The video highlights a "V-bottom" recovery in the S&P 500, which rallied from approximately 6,350 in late March to 7,089 at the time of the recording. Despite this rally, the market remains volatile, with the VIX above 20 and crude oil futures hovering around $90.

Tom Lee’s bullish outlook—suggesting the next 18–24 months could be the "best market run of our lives"—is supported by AAII retail sentiment data. Historically, when bearish sentiment exceeds 50% (as it did on April 2nd at 51.4%), the S&P 500 has returned an average of 16% over the following 12 months.

Options Probability Comparison: June vs. December

1. Near-Term (June Expiration, 57 Days Out)

• Downside Risk: The market exhibits significant put skew. There is a 20% probability of the 6,580 put being ITM and a 40% "probability of touch." The premium for this strike is approximately $6,000.
• Upside Potential: The 7,580 call has an 11% probability of being ITM, with a premium of only $2,000.
• Key Insight: The market is pricing in a much higher risk of a 500-point downside move compared to a 500-point upside move in the near term, reflecting lingering concerns over geopolitical instability and potential market corrections.

2. Long-Term (December Expiration, 240 Days Out)

• Downside: The 6,575 put has a 32% probability of being ITM and a 66% probability of touch.
• Upside: The 7,575 call has a 34% probability of being ITM.
• Key Insight: The put skew disappears in the longer-dated cycle. The higher probability of an upside move (34% vs 32%) suggests that while the market fears short-term volatility, it is more optimistic about long-term growth. The pricing parity between these calls and puts is influenced by interest rate premiums, which favor call valuations over longer time horizons.

Methodologies and Frameworks

• Probability Analysis: The speaker utilizes the tastytrade platform to compare the "Probability of ITM" versus "Probability of Touch" to gauge the likelihood of specific price targets.
• Skew Assessment: By comparing premiums of equidistant strikes (500 points above and below the current price), the speaker identifies market bias. Higher premiums for puts indicate a market hedging against a "velocity" move to the downside.
• Contrarian Sentiment Indicator: Using AAII data as a signal for market bottoms, the speaker argues that extreme retail fear is a reliable precursor to significant market rallies.

Synthesis and Conclusion

The analysis suggests a dichotomy between short-term caution and long-term optimism. While the market is currently pricing in a higher probability of a sharp downside move within the next 60 days due to ongoing volatility and geopolitical risks, the long-term outlook (through December) shows a shift toward potential upside. The disappearance of put skew in the December cycle, combined with historical sentiment data, supports the thesis that the current rally may have room to run, provided investors manage risk appropriately during the expected near-term volatility.