Kevin Davitt on Younger Generations’ NDX Influence, Volatility & Options Trends

and change. But send things back over to Chicago for now with your next guest. Thanks so much Sam. Joining me now in studio is Kevin Davitt, head of Index options content over at Nasdaq. Kevin great to have you back with us. I mean what a week for it too. It's been a very wild volatile week. We had new all time highs earlier in the week. Then we gave those back. Now what looks like we're going to wrap up the week with at least a positive day here. As we stand near these all time highs, you pointed over in the notes that you sent ovt the Nasdaq continues to outperform both the S&P 500, which also touched an all t and. Of course, as these interest rates mov higher, we've given back we've obviously pulled back today some. But I mean, certainly concerns persisting over these elevated rates. What about the outperformance of the Nasdaq isied to the actual construction of the index versus the differences between the indices. That's a perfect sort of delineation between the couple of drivers that to year after year. What has been kind of year after year outperformance, particularly post 2022.o those two elements, just to recap, are like the relative weightings of the constituents and thenre constituents differ. So let's break those down. There are either 12 or 13 names that are part of the Nasdaq 100 that are not also the S&P 500. Correlation measures will depend on how long you look at. But nearly all of them the Nasdaq 100 and S&P, are very highly correlated above 90%. Okay. So let's talk about one of the names that's gotten a whole lot of attention this year. That is part thesdaq 100f the S&P 500 space X. And let's talk about it in the context of the endlast month, indices or most of the indices that your your audis familiar with get rebalanced quarterly and reconstituted annually. So that quarterly rebaoccurred at the end last moe weight of space was impacted by that. I have a visual on it that shows that it crom our global index team that puts out great coverage week week. And the story here is driven by something you covered when it happened. But the lock up around space brought a whole bunch of shares to market that that previouren't. And so the free float expanded as a result, the influence in the Nasdaq 1ted at the end of the quarter. Now the impact that' one example of a name that thus far has performe relatively well and certainly has over this time window that you allud to and helps drive the Nasdaq outperformance, whichof yesterday's close was something like 800 basis points. Nas 100r to date performance, roughly 24% advance versus something around 14 for the for the S&P. And so thinking about the exposure that investors are looking for, those things need to be understood. And I think I say it often, but I increasingly believet my generation and younger are favorin the the recipe, if you will, of the Nasdaq 100. Yeah, certainly a lot of the data you bring to us would indicate that that's truee seeing played more at the options level with the younger generation of trader and investor is volatility. And we've been talking to Kevin Greene about it all week with this wilewe've been on. And even with that, it's still relativelydued and has been through much of the fall. What does that mean asly you look at the cost of options, and how is changing the opportunities that are available right now to traders? And I'm also going to throw in here the the October effect orte like to call it, where this is sort of psychologically t, but maybe not historically, always consistently a time that is thought of as beie dangerous or risky for the markets. Okay, a couple thingsIe you pointed out wasuably a different generational view or understanding of volatility. echo that given the work that I do, I get out there in front of a whole bunch of different audiences, and I am picking up on a consistent view about volatility that is different than the one I would have pointed to a decade ago. This thisnger cohort has embraced optionality, and they understand t volatility is something that will influence the value and the rate of change in any options value. And so the see that opportunistically. The other element that you touched on was their affinity. And this extends broadly across generations, I think for short dated options and their understanding. When you look at something like an at the money straddle, what that is implying ab expectations over a short time frame. So one of the other visuals that I pointed out looks back at this kind of month and a half, two month period that has been relatively positive for the market, where there have been no shortage of potentialysts to worry about throughout sort of late August, Septembd now we're into October. Looking at this data. It breaks down the at the money straddle, which is a forecasted range. And then the dots denote how the the index performs subsequently on that day. What I would call attention to is that, generally speaking, the at the money stradd slightl overpriced the subsequent move. That's not all unusual, but the consistency of late has been iting and The last point that I think you and Kevi Kevin Greene, have spoken about is that just becaus a measure like VIX or Vxn or your of finger in the air benchmark for volatility low, doesn't mean that you can't pally benefit from these markets that continue to chop and sort of grind higher and premium sellers. We look at data and we can segregate it. For Schwab. There's a whole lot of Sch end uhat look to sell relatively short dated premium. They have been rewarded of late. It was much more difficult b in June and July, when markets were not quite pricing the same swings. whenever you're here, I always ask about what the index options market signaling to you. And you mentioned some of those catalysts that we had in this time frame that you were looking at. And they're still all here, right? We've got markets nearord high, we've got yields rising. We still have geopoliticalk and a great deal of uncertainty. We've got elevated oil prices. Then we add in that we've got the midterm elections approaching here. So as you look at the index options mark right now, what is it telling you about where investors concerns are? Shockingly, I think to a lot o people, not not just us that follow it day in and day out, there has been relatively index option market of late.he Now we both know, and your istice understands that that can change quickly. But the one thing you know, options are based on a f looking estimate of volatility. And what we arebserving is that potential volatility is starting to be priced in. W you look at the the one month tenor and that tenor is going to capture this upcoming midterm election cycle. So when we look at sort of the the terms now reflective of uncertainty around that event. But if you look at measures like call put skew, and you look out beyond sort of that event risk, there's very little. And when you decompo into call and put volatility here, we're looking o roughly out to the end of the year. You'll notice that on the put side skew is in the sixth percentile. On the call side, it's in the 92nd or third percentile, relatively relatively low. What that means for end users is that from a pure volatilityndpoint, call spreads might make sense. Like when you g to the further out of the money in hedges screen fairly cheap again in volatility terms. B to directlynswer your question, the market here and now is not really concerned about a big move lower. And I know we know it canon a dime. But I am still constantly concern and the the shoulder shrugging that we're seeing in a lot of the market with all of the catalysts that we talk about on a daily basis. Kevin, always great to have you with us in studio. Really appreciate you taking the time ahead of your weekend to be with