Signal vs. Noise: Using NDX Volatility Spreads to Navigate Market Turbulence

Signal, Noise, and NDX Option Indicators

In March, the investing and risk management landscape didn’t just shift, it wobbled from challenging to precarious. During the first two months of 2026, the backdrop was colored by valuation concerns, the timeframe for Hyperscalers’ monetization of capital expenditures, and the potential for declining cost of capital.

March came in “like a lion” and, this time, trailed by B-2 stealth bombers. The American and Israeli military campaign across Iran pushed energy prices to multiyear highs and inflation expectations went from benign to malignant. The Nasdaq-100 Index® (NDX®) declined by nearly 5% in March alone. By the 29th of the month, NDX closed ~12% below all-time highs from five months prior.

Newspaper and round-the-clock news notifications can be dizzying. It’s challenging to parse ‘signal’ from ‘noise.’ NDX option metrics may provide useful indicators about the path forward.

The Value of Imperfect Information

For many years, the weather app on smartphones was the most frequently used interface. More recently, the data behind the information conveyed has been upgraded, but it will always be based on models/estimates. Despite the imperfect nature of the information, it’s incredibly valuable.

How often do you wonder if you need to grab an umbrella and an extra layer for the morning commute?

You could hope for the best… or use readily available data to make a more informed decision, knowing full well that forecasts will change.

Just as a weather forecast synthesizes atmospheric data into an actionable outlook, implied volatility distills market expectations into a single, interpretable figure.

Implied volatility measures can be understood as the current forecast over a specific period. They can and will change dynamically, but with an understanding of what’s typical – it’s possible to upgrade your decision making.

One Step Further

Temperature readings are taken at very specific locations. For example, the official Chicago records are recorded at O’Hare International Airport (ORD). However, there are observations at a variety of other locations that can be more useful depending on your specific position.

In summer, it’s not unusual to see a 10–20-degree (Fahrenheit) difference between lakefront (cooler) and inland temperatures in Chicago.

This dynamic is akin to skew measures in NDX.

The Cost to Collar

Let’s translate our weather analogy into options parlance.

The temperature at unique locations is like the implied volatility measured with the same maturity (expiration) but at specific points of moneyness (downside vs. at-the-money (ATM) vs. upside).

The visual below plots the difference in volatility points (Y axis) between NDX 25 delta puts and calls with a constant 3-month maturity. The volatility axis ranges between +14 and +1.5 points. The X axis moves through time (daily) evaluating the past 5 years.

The lowest spread between the out-of-the-money (OTM) put and OTM call was 2.35 vol points on March 26, 2024 (NDX all-time highs). The widest volatility spread occurred a year ago (April 8, 2025) when NDX made 2025 closing lows (-23% from highs). During the tariff-induced selloff, NDX (3M) OTM puts traded ~13.5 vol points above the 25 delta calls with the same expiration.

The 2025 spread exceeded the worst (or most opportunistic, depending on your positioning) period of the 2022 bear market (which peaked around ~12.5 vols wide). 

Source: Bloomberg

The 5-year average works out to a 6.6 volatility point premium for the puts.

The Current

Between early February 2026 and early March, when hostilities in the Middle east percolated, that volatility spread moved from ~average (6.5) to 11 points wide on April 1. In early April, NDX had entered ‘correction’ territory (10% off highs) and fallen well below its 200-day simple moving average.

Over the past week, the temperature differential between downside and upside has moderated — a potential sign that the forecast is improving. Whether it normalizes quickly, as has been the tendency since NDX bottomed in 2022, remains to be seen.

What’s Your Forecast?

Investors and traders must work with imperfect information. In much the same way that they contend with weather ambiguity. Market participants can use a wider variety of data points, including skew dynamics to fashion NDX options expressions that best express their outlook.

Hypothetical illustration, not a recommendation:

• NDX spot reference: 24,050
• VXN Reference: 29.75
• All 3M Options (July standard expiration)

Bullish Risk Reversal

Source: Nasdaq

The position sells downside volatility trading ~29% IV to buy upside vol trading ~19.8%.

• Breakeven point on July 17 (AM) settlement print = 21,790 (or -9.4% on spot)*
• Position collects $21k if held to expiration with index above 22k and below 26.2k.*
• The position makes $100 extra for every point above 26.2k on expiration.*
• The position would lose $100/per point for every handle below 21,790 on expiration.

A bearish collar would invert the position and position for potential NDX decline of at least 9.4% by July expiration (assuming no underlying long equity/futures exposure).

The forecast will keep changing. The key is making sure you're checking the right instruments, and dressing for the weather you see, not the weather you want.

*Not inclusive of any frictional costs and is for educational purposes.