The Commercialization of Defense Innovation

Talking Trends

Defense technology has always been a crucial aspect of national security. In recent years, the growth of defense tech has been remarkably significant, driven by advancements in technology and the increasing complexity of modern warfare.The integration of cutting-edge technologies, such as AI, machine learning and quantum computing, into defense systems has revolutionized the industry. These technologies provide unprecedented capabilities, from predictive analytics to enhanced decision-making processes, driving the growth and innovation in defense tech. As defense technology continues to advance, the sector is poised to for sustained expansion, with global defense spending projected to surpass $3.4 trillion by 2030.

One of the most critical components of this growth is cybersecurity, which has become indispensable in the realm of defense. Even Rogers, Co-Founder & CEO of True Anomaly, and Brad Harrison, Managing Partner at Scout VC, explore commercialization of defense innovation and the role that cybersecurity and public-private partnerships play.

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For the past few months, geopolitical uncertainty has dominated the markets. How has options activity been during this period of volatility?

Overall, industry volumes continue to set new records. Total volumes in Q1 of 2025 are up roughly 20% compared to 2024 averages, which was a record-setting year. The “hockey stick” like growth in option volumes continues.

I would argue that the volatility has not been limited to the past few months. Realized volatility really picked up in the back half of last year - from the July/August selloff that culminated in the “carry trade unwind” to the U.S. elections and into year end. Volatility ratcheted higher in 2024 and that continues this year.

Generally, there’s a positive correlation between volatility and option volumes. Meaning, when vol increases, so does activity. However, historically, there’s been an inflection point. Volatility can reach levels where market participants are disinclined to buy or sell options. They sit on their hands and wait for volatility to normalize. We’ve not seen that occur yet in 2025.

With this broader uncertainty, do you think more investors are using options to hedge risk in this market environment?

The short answer: yes! But in truth, the answer is more nuanced. For example, in down markets like we’ve experienced in Q1, activity tends toward index products options as opposed to hedging single stock or idiosyncratic risk. Thinking more broadly, institutional and individual portfolios increasingly resemble the construction of the Nasdaq-100® Index (NDX). Given that correlation, we’re increasingly seeing the industry gravitate toward Nasdaq-100® Index Options (NDX) for protection.

There’s no way to objectively answer that question because we only see part of the overall economic puzzle. The exchange doesn’t know the motivation behind any positioning. If we look under the hood in NDX, volumes often increase alongside macro volatility. That was the case in recent weeks. However, the put/call ratios and other similar metrics don’t indicate an unusual interest in downside protection.

The final point worth making has to do with the supply and demand dynamic for calls and puts at the index level. NDX skew can be viewed as a proxy for the demand for out-of-the-money (OTM) puts relative to OTM calls.

How does implied volatility affect option prices?

There’s probably a couple of ways to answer that question. From a foundational perspective, implied volatility (IV) is a dynamic estimate of how volatile the reference asset will be in the future. It’s an annualized measure and often moves in concert with realized volatility.

IV has a positive correlation to the price of both calls and puts. In other words, if IV moves higher, so too will the value of call and put options for that underlying instrument (and vice versa). So, IV has a very tangible impact on the “cost” of an option.

In less clinical terms, IV is a current measure of future uncertainty based on the price of the option. If there’s a great deal of uncertainty, the relative cost of optionality increases.

In your recent TradeTalks interview, you highlighted the shift toward index options products in the first quarter of this year. What's driving this shift, and do you expect it to continue for the rest of the year?

The shift towards index options has been years in the making at this point (not limited to Q1). From my perspective, the sea change occurred in 2022 as central banks globally shifted away from zero-bound interest rate policy. It was an unusual year with higher correlations than we’ve observed in years.

Painting with a broad brush, investors were concerned with macro risk as opposed to idiosyncratic (single-stock) risk. Index options are one of the primary tools to manage macro risk. So, the growth in the first three months of 2025 is simply the continuation of a growth story that started more than three years ago. “Headline risk” is very much back in play in 2025 and I believe index options will remain the vehicle of choice to manage high level market risks.

During the global pandemic, we saw not only a rise in retail trading in general, but specifically a rise in options trading. In the years since the onset of the pandemic, options activity remains robust, but can you speak to the need for ongoing education for retail investors?

That’s a topic near and dear to my heart. For the past decade, my work has centered around advocating for the informed use of options, and where appropriate, index options. The critical term there is “informed.” The access to information about equity and derivative markets has never been better. I believe that groups like the Options Industry Council, exchanges like Nasdaq, and the brokerage firms that connect retail investors to markets have done a very good job making education readily available.

I believe, on average, those new to these markets are significantly more well informed than in previous periods of volume growth. Generally speaking, any advice that leads with “making money quickly,” should be avoided.

Throughout time, equity and derivative markets have been tools to grow and manage wealth. When you combine broader access to capital markets with the information end users require to make informed decisions, I think you set the stage for decades of future growth.

Do you have any unique predictions for the outlook of options activity?

I don’t think this would qualify as a “unique” prediction, per se, but it’s something I feel strongly about, so I’ll share.

My belief is that the growth to date in options-based ETFs is just the beginning. Thus far, the focus of these product launches has been around income strategies and defined outcome sleeves. The accumulation of assets under management (AUM) gets attention, but typically in the context of “fear.”

The coverage has skewed toward the sensational with these products. The specific comparisons that seem most inappropriate to me draw analogies to AUM growth in short volatility ETPs in 2017. The exposures, specifically the beta of these structures, are so meaningfully different from something like a levered short volatility product – it simply doesn’t make sense.

I believe these products meet investors' needs on multiple planes. At a high level, investors want ‘optionality,’ particularly on the downside. By and large, they are willing to forgo some of the right tail distribution for greater certainty during risk-off periods. Others want to maintain their core equity exposure and potentially generate some income against the position. The products thus far are generally created with those goals in mind.

My belief is that we’ll see many other iterations as the listed options-based ETF market increasingly resembles the structures available in the over-the-counter market now. It’s cliché, but true – these products are democratizing access. In that sense, the comparison to the introduction of broad-based ETFs seems more accurate. This time we’re just including options within the tax efficient ETF wrapper.

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