Is the Bubble Learning How to Code?

Andrew Wilkinson sits down with Kevin Davitt, Head of Index Options Content at Nasdaq, to unpack what recent market volatility really means, how the “cost of protection” helps investors read the mood of the market, and whether today’s optimism is backed by fundamentals or just silicon dream.

Summary – IBKR Podcasts Ep. 307

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson

Good morning. How are you? This is Andrew Wilkinson with Interactive Brokers. Today, for this week’s Midweek Podcast, I’m joined by Kevin Davitt, who’s the Head of Index Options Content at Nasdaq. Welcome back to the program, Kevin. 

Kevin Davitt

Thanks for having me, Andrew. I’m excited to be here, as always. 

Andrew Wilkinson

You are not the only one who’s back — we’ve got some volatility back. But put its return in context. We had a significant reversal in the market last week, a rebound on Monday, then another fall, and now today, being Wednesday, the market’s back up again. What is the current cost of protection, and what is it saying about where we are in the stock market? 

Kevin Davitt

Ooh, I really like the way you frame that — paying particular attention to the “cost of protection” element. In my opinion, that’s a really foundational understanding if you operate in markets using options. What do I mean by that? What is the cost of exposure — if I want exposure to the upside, downside, or some specific slice of the distribution of outcomes? Thinking in those terms. I also think we like benchmarks — and I like analogies. So, you go to Trader Joe’s, the grocery store, whatever, and bananas are a quarter. It’s easy for me to know if they’re suddenly more or less expensive. Or earlier this year, the examples that were thrown around about a dozen eggs. With markets, it’s less easy. But as many of your listeners probably know, implied volatility levels become that common denominator that allows you to evaluate the cost of exposure relative to some historical norm. Now, somewhat long-winded intro to your broader framing: through yesterday’s close, the cost of protection in the Nasdaq-100 — which is where I focus my attention — is higher than it has been for the past couple of months, but relative to a longer-term view, we’re in line with what’s normal. 

Just to give that some sense of validation, the longer-term annualized volatility — so we’re talking about realized vol here — in the Nasdaq-100 is around 21%. And we have the VXN, which is the VIX methodology but with inputs from Nasdaq-100 options, measuring right around that level now. For those that live in the here and now and are looking for opportunity or potential opportunity, the question revolves around: was Friday’s 4% high-to-low move off of all-time highs the start of another stretch of meaningful realized volatility like we saw in April? If so, then I would argue that the current cost of protection is reasonable — potentially cheap. But if we quickly move back, like the past couple of days have seemed to, to the broader trend of relatively muted vol — and we’re not going back to an April environment — perhaps it’s high. And that’s the beauty of markets — you’re afforded an ability to express your view as to whether things are relatively high or low. 

Andrew Wilkinson

Kevin, as you said, you live inside the realms of the technology market. I see you as a bit of a hobbit running around those corridors and opening doors — looking at what’s in here, what’s in there. Where are you seeing pockets of strength, and where are you seeing pockets of weakness within technology? 

Kevin Davitt

Oh, keeping it strictly within tech — that’s a good question. Let’s be a little bit broader because, both broader and narrow, here and now we are moving into earnings season. You have that generally led by big banks. And yesterday, you had some comments out of Chair Powell, which sort of fueled some flows back into areas that have been beaten down relative to big tech for quite some time — like the cyclical stuff: energies, financials, and small caps. That has happened in fits and spurts for a long time. But bigger picture — this year included — technology encompasses so many things, right? Technology touches everything, whether you’re a big bank or an energy company. If I look at the distribution of the big names that have powered markets largely for the past three years, it’s interesting to see that since Friday’s open, Nvidia is the laggard. And that is the biggest constituent in the Nasdaq-100 and the S&P 500 through yesterday’s close. 

The only name in that group that gets thrown around often that’s higher is Google. But the broad market is off by somewhere between one and two percent. So I’ll be looking to — and I don’t want to poke into too many specific names — but I’ll be looking toward two weeks from now when the names that we mention here and talk about in terms of big tech start reporting earnings, because I think that’s where the rubber meets the road and where a lot of the talk around potentially frothy valuations has been centered. But for the past couple of years, earnings have kept up and exceeded expectations — and that has allowed the market to move higher, in my opinion. 

Andrew Wilkinson

There’s been lots of chatter recently about “irrational exuberance” and comparing the current AI boom to the dot-com era. Do you think that’s a fair comparison? Reasons to believe that it’s different this time? 

Kevin Davitt

Those are dangerous words — and there has been quite a bit of chatter. Of the coverage that I’ve followed, the corollaries that are most reminiscent of the late ’90s involve some of the revenues or deals dependent on circular financing or vendor financing — that has been somewhat of a hot-button topic lately. Mike Green, who is a friend and has an amazing Substack, did an interview spot on this recently. He reframed it in a way that I really enjoyed. He highlighted the cash flow and debt levels, as well as the margins that many of the companies employing this approach lately enjoy — and that swung my mentality from a knee-jerk “yeah, that seems questionable” to “maybe that is a much more thoughtful way to frame this conversation.” 

So let me explain that a little bit. Things are so dramatically different for the big names driving broad markets relative to 25 years ago in the context of money-making. Twenty-five years ago, the big drivers of markets were largely prolific money-losers — and the market was valuing the potential for growth in time. It did get out over its skis, in hindsight — very easy to say after the fact. 

The companies mentioned today — whether it’s Oracle or OpenAI or Nvidia or AMD — mostly, with the exception of OpenAI which isn’t public, they’re all cash cows. I think the question becomes — and I alluded to this when we move into earnings for these big tech companies — these companies that have significant margins and make a lot of money: in 2025, they’ve been investing a great deal of capital into the infrastructure to support the continued growth of AI. 

Will they be able to monetize that? Will their margins diminish? Will we overbuild capacity — like the sort of bellwether there was Nortel Networks back then, if any listeners are into history? I don’t know. But I think it’s a concern. And I would argue — and maybe I’m being a bit of a homer here — that one potentially very accessible way to manage that concern is using index options. Granted, I’m paid to think this way, but I also believe the market looks at it this way too: that the Nasdaq-100 would arguably be a cleaner expression of that concern, given the higher levels of concentration to most of the names that I mentioned. That said — and this will be my last point — market timing is incredibly difficult in the short term, and over the long term, I would argue it’s almost impossible. From an options perspective, I think panic is easier to identify than market tops. Complacency looks very different — and complacency and low-volatility grind-hires can continue for many years. 

So that’s my very political kind of answer to “I don’t know.” But there are tools your audience has access to — very liquid ways to spread your chips across time, tenors, and exposures — and I think the audience, the world, continues to become much more sophisticated about how they go about that. 

Andrew Wilkinson

What I’m really enjoying on my commute these days is listening to Andrew Ross Sorkin’s 1929 on the BBC. Absolutely fascinating — if you get a chance to listen to that, Kevin. 

Kevin Davitt

He is such a good writer and speaker. And I appreciate any sort of recommendations from you, Andrew. I look forward to that — I’ve got a flight later; I’m going to be listening. 

Andrew Wilkinson

Excellent. Alright, Kevin, as always, a pleasure. Thank you very much for joining me today. 

Kevin Davitt

Thank you for having me. 

Andrew Wilkinson

And to the audience — if you enjoyed this episode, there’s plenty more wherever you download your podcasts from. Subscribe to us there. Bye for now.