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

SPEAKER_1 (0:00)

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 it 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 over that the Nasdaq continues to outperform both the S&P 500, which also touched an all-time high, and the Russell 2000, even of course, as these interest rates move 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 is tied to the actual construction of the index versus the differences between the indices?

Kevin Davitt (0:53)

That's a perfect sort of delineation between the couple of drivers that lead to year after year, what has been kind of year after year outperformance, particularly post 2022 So those two elements, just to recap, are like the relative weightings of the constituents, and then where 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 in the S&P 500 Correlation measures will depend on how long you look at, but nearly all of them, the Nasdaq 100 and S&Ps, are very highly correlated, above 90%.

So let's talk about one of the names that's gotten a whole lot of attention this year that is part of the Nasdaq 100 and is not part of the S&P 500

And let's talk about it in the context of, at the end of last month, indices or most of the indices that your audience is familiar with get rebalanced quarterly and reconstituted annually. So that quarterly rebalance occurred at the end of last month and the relative weight of SpaceX was impacted by that. I have a visual on it that shows that it comes from our global index team that puts out great coverage week after week. And the story here is driven by something you covered when it happened. But the lockup around SpaceX brought a whole bunch of shares to market that previously weren't. And so the free float expanded. As a result, the influence in the Nasdaq 100 was adjusted at the end of the quarter. Now, the impact, that's one example of a name that thus far has performed relatively well and certainly has over this time window that you alluded to and helps drive the Nasdaq out performance, which as of yesterday's close with something like 800 basis points, Nasdaq 100 year to day performance, roughly 24 percent advance versus something around 14 for the S&Ps. 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 believe that my generation and younger are favoring the recipe, if you will, of the Nasdaq 100

SPEAKER_1 (3:28)

Yeah, certainly a lot of the data you bring to us would indicate that that's true. And another thing that we're seeing played more at the options level with the younger generation of trader and investor is volatility. And we've been talking to Kevin Green about it all week with this wild ride that we've been on. And even with that, it's still relatively subdued and has been through much of the late summer and into the early fall.

What does that mean as you look at the cost of options and how is it changing the opportunities that are available right now to traders? And I'm also going to throw in here the October effect or October phobia, as some people like to call it, where this is sort of psychologically thought, but maybe not historically, always consistently, a time that is thought of as being more dangerous or risky for the markets.

Kevin Davitt (4:16)

Okay, a couple things I hope to get to. The first one you pointed out was arguably a different generational view or understanding of volatility. I 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 younger cohort has embraced optionality, and they understand that volatility is something that will influence the value and the rate of change in any options value, and so they 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 they're understanding when you look at something like an at-the-money straddle, what that is implying about expectations over a short timeframe. 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 potential catalysts to worry about throughout sort of late August, September, now we're into October.