Subscribers to Chart of the Week received this commentary on Sunday, January 5.
For the fifth straight year, options contracts saw record-level volume in the U.S. Per data from the Options Clearing Corporation, nearly 10.2 billion equity options contracts were exchanged in 2024, a figure that already eclipsed the 2023 record of just under 10.1 billion.
Retail traders are driving this growth. Amateur traders made up 29% of U.S. options activity as of September, up from 23% at the start of 2020, according to Bloomberg Intelligence. With a Trump administration light on regulation and embracing the volatility of speculative assets like cryptocurrencies, now more than ever its important to educate yourself on options trading and craft a plan for 2025.
Therefore, I asked a few of our traders to help provide a road map for 2025.
What sectors/areas are you monitoring that you think could have a big (or rough) year?
Jared Chantala: Similar to my outlook for 2024, my expectations for the direction of the market and how it might play out over the next 12 months are based on the direction of Treasury yields, bond prices, the renewed strength of the U.S. Dollar (DXY), and the effects these asset classes could have on equities and the broader market. U.S. equities performance was carried in large part by the “artificial intelligence (AI) boom” and a dovish Federal Reserve throughout 2024, as yields on U.S. Treasuries topped out and trended lower throughout the majority of the year, as the Fed began its rate cutting cycle. The S&P 500 Index (SPX) and Nasdaq Composite Average (IXIC) closed out the year 23% and 28% higher, respectively – well above the benchmark 10% average annualized return. Yields, however, closed out the year significantly higher over renewed inflation concerns, as the consumer price index (CPI) ticked higher into the latter course of the year.
As I had anticipated throughout 2024, the downtrend in Treasury yields would have helped boost smaller cap and more speculative names, which eventually played out in the latter half of the year, as the Russell 2000 Index (RUT) retested, traded above but failed to hold its previous all-time high from November 8, 2021. Since retesting this significant longer-term price level, smaller cap names have retreated, as the index quickly pulled back over 10% from its recent highs, as inflationary concerns are beginning to resurface, which has put a strain on bond prices and sent yields higher in its wake.
At last check, Fed Funds futures are pricing in an 88% probability that the Federal Reserve pauses interest rate cuts at its next meeting scheduled for Jan 29. With a data-dependent Fed on the helm, the fate and performance of the broader market will likely hinge on the future path of interest rates. With a strong US dollar, the market could be pricing in higher rates for longer – at the very least. Given the sensitivity of the market to an uptick in the Consumer Price Index (CPI), interest rates and a strong dollar, my outlook for 2025 emphasizes caution against smaller cap and more speculative names back into larger cap and higher-quality growth stocks until recent trends in inflation, yields and a stronger dollar abate.
Reilly McAdams: Looking ahead to 2025, there are several sectors that could experience significant developments. Robotics is set for a massive year, with advancements in AI driving faster progress in machine learning and robotics. Telehealth continues to attract attention, with established players like Him's & Hers Health (HIMS) leading the way, but newcomers such as Amazon.com (AMZN) entering the field, along with smaller companies like TalkSpace, which is seeing increased demand for online psychological services.
The biotech sector is poised for a potential bounce in the middle of the year, as several key companies release clinical data. On the other hand, airlines may face challenges as speculation about lower oil prices fades, especially if oil prices remain flat or rise, potentially reversing the strong performance seen toward the end of 2024. The defense and aerospace industries could undergo a major shift, with the new administration pushing for a focus on drones and unmanned weapons, possibly leading to acquisitions by legacy companies.
Joe Hargett: I’m expecting AI (Meta, Planatir, Google) and data processing (i.e. AI support like IBM (IBM), CrowdStrike (CRWD), OpenAi, Samsara (IOT), AMZN) to have big years as this sector finally comes into early stages of maturity. We’ll see some of the weaker players in this sector relegated to the bottom, however, as investors look for AI-related revenue. I’m also expecting natural gas to make a comeback due to geopolitical tensions and hydrogen power-related initiatives. But I’m expecting nuclear to finally come into its own as some of the microreactors begin official testing in February with the DoD — eVinci from Westinghouse, owned by Cameco (CCJ) and BN.
I’m avoiding housing and consumer discretionary due to financial uncertainty with rates and housing prices, as consumers adjust to higher prices post record inflation.
What are your options trading resolutions for 2025?
McAdams: When it comes to options trading resolutions for 2025, the goal is to trade less but with more conviction, while also learning new strategies to refine trading skills. There's a focus on finding the right levels to buy LEAPs (Long-Term Equity Anticipation Securities) in favorite stocks, allowing for long-term gains.
Hargett: My biggest resolution this year is to stop second-guessing myself and take what the market is giving me. I talked myself out of so many trades last year that would have been big winners, all because I gave in to market volatility intimidation. As options traders, it’s easy to get too caught up in “what ifs” and “could have beens.” That’s letting emotion control your trading. But when you let that go and trust the process, your results really do improve.
What did you learn from the last calendar year? Any surprises? Anything you nailed?
Chantala: Towards the end of 2023, my outlook for the following year and the broader market was largely based on future interest rate expectations. After the CPI peaked into 2023 and began its precipitous decline, market participants began anticipating the likelihood the Federal Reserve would begin to cut interest rates. The more the rate of inflation continued its decline, the greater the odds began favoring the timing and extent of the next rate cut cycle. In fact, yields peaked and began to decline in late October and moved to their lowest levels in over a year. Moreover, the October 2023 peak in Treasury yields and eventual rollover marked a trough and three-month lows in the major indices, as yields are generally inversely related to equities.
Given these expectations, I personally anticipated outsized moves in the Russell 2000 and smaller cap, more speculative names, in general, which is precisely what occurred.
McAdams: Reflecting on the previous year, a few key lessons stand out. Being early to a trend can be tough but very rewarding. Additionally, it's important to trim positions when markets get frothy, but avoid taking everything off the table, as overbought stocks can stay elevated longer than expected. Natural gas was a standout performer, and proper risk management—removing exposure near market tops and adding during dips—proved effective, especially with larger positions taken before the election. Unexpectedly, Nvidia (NVDA) held strong in its valuation, and Tesla (TSLA) made a surprising run late in the year toward new all-time highs, after stagnating for years.
Hargett: Last year I predicted that AI, semiconductors, and energy would have a big year. It seems like a no-brainer in hindsight, but I nailed that prediction as these sectors let the market to its biggest gain in years. I’m expecting much of the same this year, with some needed winnowing of the weak from the AI and semiconductor herds. As for surprises? I predicted that housing and leisure would have a rough year in 2024. Boy was that wrong. While rates declined slightly, prices stayed high; but that did little to tamp down demand, and housing stocks did surprisingly well. As did leisure stocks like Royal Caribbean Cruises (RCL) and hotels. I wonder if I’ll be pleasantly surprised at consumer resilience in 2025 as well…