Is the Bubble About to Pop?

In this episode, Andrew Wilkinson and Kevin Davitt unpack recent market volatility, Bitcoin’s dramatic moves, and what index options reveal about investor sentiment heading into year-end. From tech earnings to macro uncertainty, they explore whether the current environment signals a looming correction, or just another bump in a dynamic market.

Summary – IBKR Podcasts Ep. 316

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 

Welcome to this week’s Market Minute with me, Andrew Wilkinson, and my guest Kevin Davitt, who’s the Head of Index Options Content at the Nasdaq. Kevin, how are you, mate? 

Kevin Davitt 

I am doing well. What about yourself, Andrew? 

Andrew Wilkinson 

Very good, thank you. It is Wednesday, the 5th of November. We’ve had a bit of a wobbly Tuesday, and the markets are a little more stable this morning. What I couldn’t help but notice yesterday, Kevin, was an exaggerated decline in Bitcoin towards, and then even through, a hundred thousand dollars. I’m not sure—it’s hard to tease them apart. Was it stocks? Was it crypto? There was a sense of doom. There was a conference in Asia where several of the leading U.S. bankers referred to—when asked—they referred to, yeah, there’s a likelihood of a bubble going on here, or a 10 to 20% correction at some time in the next couple of years. What are your thoughts overall on risk appetite in this environment? 

Kevin Davitt 

I love the way you frame questions, Andrew. What are my thoughts? I think that the bubble talk has been percolating now for the past couple of months, let’s call it. And I don’t think that’s likely to change in the near term. Now, the point about Bitcoin—one of the ways you wrapped that question was around the velocity of the move, and I think much of your audience understands that Bitcoin tends to move with more significant velocity than something like the broad equity market. And even the Nasdaq 100, though the two assets have been fairly highly correlated over lengthy amounts of time. So yesterday, Nasdaq 100 declines roughly 2%, Bitcoin down in the ballpark of 5%. If we’re talking about betas, it’s a higher beta mover. That has been the case for many years. 

I think the thing that gets the most attention, whether you like it or not, is that big round number of a hundred thousand, and there’s some anchoring that goes on around people that have perhaps bought around that level. And when there is a concentration of open interest—whether it’s in index options, equity options, or a specific level on Bitcoin—there can be increased activity and increased volatility. As you mentioned, there is a bit of a calming on a macro basis this morning. Bitcoin is back above a hundred thousand. Does that mean all is right in the world? Who knows, right? We’re in a dynamic market. 

Andrew Wilkinson 

We’ve mainly got through earnings season. What have you observed from big tech during earnings season, Kevin? 

Kevin Davitt 

So your point last week was the most meaningful in terms of market cap—the big names reporting—and five of what we are now internally calling the elite eight, extending that Mag Seven naming, five of them reported. And I think the big picture message is that the hyperscalers keep spending, so CapEx growth continues, and in most cases, that rate of investment is expected to increase. I think the market heard what it wanted to hear. I think they largely delivered. Now, the sort of primary outlier was Meta, or Facebook, where they have made it very clear that the risk of overinvestment they consider less concerning than under, and the stock pulled back in the ballpark of 12%. So that outkicked its coverage in terms of the expected move that the options market implied. I think, again, big broad picture—we’ve got an increasingly bifurcated market. So the spread between outperformers, which generally have been technology and consumer discretionary, and underperformers continues to widen. And perhaps that has masked some concerns with respect to breadth underneath the hood of the broad market. And I think you saw that sort of spillover yesterday. Whether it continues remains to be seen. 

Andrew Wilkinson 

Gotcha. Let me ask you now, since we’ve just gone through Halloween, what scares you the most? Is it the fact that, economically speaking, we’re flying blind—we don’t have much economic data? Or is it perhaps what the economy looks like when the government does reopen and we start getting economic reports again? 

Kevin Davitt 

So given those two choices—and maybe this isn’t a super welcome interview response—but neither of those scares me particularly much. 

Andrew Wilkinson 

Okay. 

Kevin Davitt 

I could find plenty of things that scare me more than the lack of weekly economic data. And this Friday we almost certainly won’t get the monthly jobs report. Now, to be clear, I welcome an end to the shutdown, and I’m glad I’m not directly impacted. I’m a fan of functioning government. But my concerns tend to skew more big picture, and in that sense, I think I would be more representative of the broader public than somebody looking to opportunistically trade around, let’s say, government data—which we’re not getting. And I would say that markets continue to function just fine. What concerns me big picture is, to a certain extent, the talk of bubbles or potential malinvestment. And then much longer term—like what does this mean for the broader economy? What’s it mean for my son who’s about to be 11? What sort of job market will he work himself into in a decade or so? And then what skills are going to be marginalized? And also, like, why do Doritos cost like six or seven dollars a bag? Now I’m like everybody else there. 

Andrew Wilkinson 

I hear you. I feel a lot of pain too when I go to the supermarket. Kevin, let’s talk about the remainder of the year. It’s seven weeks to go before year-end. What insight can you deliver from the index options market to indicate how the rest of the year plays out? 

Kevin Davitt 

I do appreciate that framing. I think—and perhaps the audience does—that’s the lens through which I tend to see the market. I think there are a wide variety of ways that question could be approached, and my point there is that the index option market is rich with information, whether you are trading in there, managing risk in those products or not. So understanding that information-rich dynamic is important. If we go relatively basic, I looked at the year-end. So there are options that expire on December 31st that are currently listed. The straddles for both the Nasdaq 100 and the S&Ps—the expectations as of today are up or down about 5% for the S&Ps. Okay, so seven weeks, 5%, fairly typical. The implied straddle is six and a half in the Nasdaq 100. That makes some intuitive sense. The NDX tends to have slightly wider distributions than the other. Slightly more nuanced angle that I took is—there’s been a lot of talk about skew lately. Short skew is the relationship between out-of-the-money options and often relative to the at-the-money. Is there greater demand for downside hedging or upside exposure? Here’s where I think it gets a little bit interesting. What I looked at was the 25 delta put implied volatility minus the 25 delta call, divided by the at-the-money vol to normalize it. And the Nasdaq 100 puts are trading at a 26% premium on a normalized basis. I know I’m throwing around a lot of numbers here—26% premium to the NDX puts. It’s a 41% premium on a normalized basis in the S&Ps. I think it’s possible you could argue that the Nasdaq 100 puts might look cheap on a relative basis just based on that. You could also argue that the NDX calls look rich. 

But keep in mind that if we have a broad market melt-up—which some people have been talking about into the end of the year—that would likely be led by big tech, which would be a continuation of the market that we’ve seen lately. 

And in that situation, perhaps the recent kind of reach for out-of-the-money upside exposure in the Nasdaq 100 makes sense. Again, going back to my original point—this is an information-rich market, whether you’re using it or not—and understanding those dynamics and how they might influence the names that you care about is the key. 

Andrew Wilkinson 

We packed an awful lot into this Market Minute. Kevin Davitt, thank you very much for joining me. 

Kevin Davitt 

My pleasure. Thank you for having me. 

Andrew Wilkinson 

And to the audience—if you enjoyed today’s episode, don’t forget to subscribe to this podcast wherever you download your podcasts from.