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Asset Servicing | January 22, 2026

Options Quarterly Commentary Q4 2025

US equities ended the fourth quarter of 2025 higher despite a challenging macro backdrop, closing at 6845.50, up +2.35 % vs Q3 2025. Performance was supported by resilient earnings growth, easing inflationary pressures, and 50 basis points worth of interest rate cuts from the Federal Reserve. Even after the sharp sell-off in April following the Trump administration’s tariff announcements, the S&P 500 closed the year up nearly 18%, delivering a third consecutive year of double-digit gains.

Volatility defined much of the quarter with markets facing a series of headwinds, including the longest government shut down on record, weak labor data, policy uncertainty, and renewed concerns around lofty AI valuations. Average VIX levels in Q4 were 15% higher than Q3, ranging from a peak of 26.42 on November 20 to a low of 13.47 on December 24.

Volatility followed a clear progression through the quarter with October’s tariff-related disruption, November’s spike driven by valuation concerns and policy uncertainty, and December’s sharp compression to multi-year lows. SPX skew flattened meaningfully in the final two weeks of 2025, reflecting a combination of reduced hedging activity and increased demand for upside exposure (Nomura). According to CBOE, one-month skew (25- delta) fell from the 90th percentile in mid-December to around the 40th percentile by year-end (CBOE). The CBOE Volatility Index (VIX) closed the quarter at 14.95, down -43% from its November peak and -8.2% lower vs Q3 2025.

The S&P 500 finished 2025 with an 80th percentile 18.6% realized volatility. It was noted by Rocky Fishman from Asym 500 how unusually concentrated volatility was in 2025, with just five trading days accounting for nearly 15% of total absolute returns, the highest since 1987. 

 SPX and VIX performance Q4 2025 (Source: Bloomberg)

 

Key Themes in 2025

1.       Record Options Trading Volumes

Options trading activity reached record levels in 2025 amid a year of heightened volatility. According to OCC data, total options volumes hit 15.21 billion contracts, up 24.4% vs 2024. By product type, volumes were split approximately 54% equity options, 37% ETF options and 8.3% index options. In 2025, retail traders accounted for approximately 30% of total options volume, underscoring the impact retail investors now have on market outcomes.

December also saw a record options expiration, with an estimated $7.1 trillion in notional options exposure expiring, reinforcing the growing influence of options positioning on short-term market dynamics. Structurally, the US options market remains highly competitive and fragmented, with 18 active exchanges and two more expected to launch in 2026.

2.       Continued Rise of Zero-Day-to-Expiry (0DTE) Options

0DTE options have become a dominant feature of options trading, representing ~23% of total US options flow in 2025 (as shown below).  Most notably 0DTE SPX options average daily volume reached approximately 2.3 million contracts, representing 60% of total SPX option volume (CBOE), underscoring how dominant same day expiries have become in the index space.

This growth has largely been driven by retail investor participation, accounting for roughly half of all 0DTE trading (Bloomberg), and points to more speculative retail behavior. The surge in 0DTE activity has impacted market volatility and liquidity dynamics, with heavy trading around key macro events often amplifying price swings, as 0DTE trades are hedged by dealers who buy or sell stock to remain delta neutral.

Source: Goldman Sachs

 

3.       Bullish Retail Investors vs Cautious Institutional Investors

Citadel data shows that retail investors maintained a persistently bullish stance throughout 2025. As you can see below, in all but five weeks of the year, retail investors were net buyers of calls, signaling their strong risk appetite despite periods of elevated market volatility. Citadel highlights that retail investors stayed calm during bouts of volatility and historically, retail positioning remains relatively balanced as average VIX levels rise, up until 35. Beyond this threshold sentiment appears to shift, with extreme net sell days occurring at roughly twice the frequency of extreme net buy days.

In contrast, institutional investors adopted a more cautious approach to positioning, reflecting a greater focus on hedging, evidenced by the put-call ratio being far less consistent week to week. This suggests more tactical positioning and risk control during volatile periods rather than persistent bullish conviction.

Source: Citadel Securities

 

Looking ahead to 2026

Conflicting AI narratives and US political uncertainty are creating a supportive backdrop for continued market volatility in 2026. Strategists expect equity volatility to remain elevated, with many warning that the tech bubble could become increasingly unstable. Against this backdrop, UBS strategists argue that whether the AI boom ultimately continues or reverses, exposure to options that profit from higher volatility on the Nasdaq offer a way to position for both sides of the trade.

Historically, midterm election years represent the most volatile phase of the four-year presidential cycle. According to Aptus Capital Advisors, the S&P 500 experiences an average intra-year decline of 19% during midterm years, compared with 12% in the other years, alongside a 16% average drawdown across the full cycle. This historical pattern reinforces expectations for elevated volatility throughout 2026.

Geopolitical risks have also surfaced early in the year, with developments in Venezuela driving a sharp increase in gold volatility and positioning turning notably more defensive. One-month GLD skew steepened to the 80th percentile in early January, reflecting increased demand for downside protection (CBOE). CBOE highlighted that during this time GLD puts traded at parity with calls, suggesting markets priced downside risk equal to upside potential for gold in the short term (the first time since May 2025).

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