Options Quarterly Commentary Q2 2025

The second quarter of 2025 was marked by pronounced market volatility as investors contended with tariff policy uncertainty and an escalating war in the Middle East. On April 2, President Trump’s ‘’Liberation Day’’ announcement of harsher than expected tariffs triggered a sharp sell-off, with the S&P 500 falling nearly 12% in a single week. The VIX soared in response to the tariff announcement, closing at VIX 52.5 on April 8, marking its highest closing level since April 2020, during the peak of the COVID-19 pandemic. President Trump’s subsequent 90-day tariff pause on April 9 triggered a 44% intra-day swing in the VIX, from being up 10% (reaching an intra-day high of 57.96), to down 34% at the close. SPX intra-day volatility doubled, surpassing the highs seen during 2020, and approached levels last seen during the 2008 Financial Crisis where the VIX traded 80+ both in 2008 and 2020 (CBOE). Markets staged a powerful rebound with stocks hitting all-time highs heading into quarter-end, supported by progress in a US- China trade deal, renewed investor confidence, a robust Q1 earnings season and growing optimism around potential rate cuts. The S&P 500 Index: SPX ultimately closed the quarter at 6204.95 (+10.6% vs Q1 2025). As noted by JPM equity derivatives research, equity volatility saw a rapid normalization following tariff de-escalation, with the VIX halving its peak in just 12 trading days, marking the second fastest normalization ever, with the VIX dropping around 35 points in the two months following the announcement. The CBOE Volatility Index: VIX closed at 16.73 (-27.2% vs Q1 2025).

_{Source: Bloomberg}

June options expiration marked the largest in history, with $6.5 trillion of equity options expiring. The event was particularly notable due to high levels of positive dealer gamma positioning which significantly suppressed volatility. These dynamics arise when market participants consistently sell more volatility than they buy.  As a result, dealers are long gamma (long calls or puts) and to remain delta hedged, buy in dips, and sell in rallies. These hedging flows dampen volatility and create a pinning effect in equities. Following the June options expiration, the S&P was able to break out into a broader trading range due to the reduction positive gamma positioning. Volatility selling has been a trend that has significantly increased over recent years. A key driver of this are ETFs utilizing embedded options strategies that systematically sell volatility for income. These strategies have expanded rapidly over the last five years amassing to a total $237bn AUM (see below). 

_{Source: Nomura}

Another trend to note was the surge in volume in zero-date-to-expiry (0DTE) options in Q2 and according to the CBOE, May was the second highest month in 0DTE trading on record, averaging 2.11M contracts, or over $1.2T notional, a day (record is Mar2025 with 2.17M contracts ADV). The growth in 0DTE trading in May came on the back of a rebound in retail trading, which had dipped during the April spike in volatility. SpotGamma note a trend of reduced 0DTE flows during periods of high volatility, such as the April tariff turmoil as a result of 0DTE traders taking a back seat during these times, in addition to an increase in longer dated options activity for hedging purposes.

By the end of the quarter, equity implied volatility broadly declined as geopolitical risks in the Middle East subsided and tariff fears eased. According to CBOE, the majority of the VIX decline was driven by the S&P rally; however, a shift lower in the volatility surface and SPX skew flattening accounted for roughly a quarter of the decline. They note the decline in skew was primarily concentrated in the front month (as shown below), indicating the move was largely driven by ‘’FOMO’’ type call buying as a response to the market rally.

_{Source: CBOE}

Typically, during the summer months, market volatility tends to be elevated largely because of thinner liquidity, which can lead to sharp and unpredictable price swings. Looking ahead to Q3, equity volatility is expected to climb ahead of the upcoming tariff deadlines, particularly with the S&P trading at a record high. CBOE has highlighted the emergence of the ‘’spot up / vol up’’ dynamic as we enter Q3 reflecting a scenario where both equity markets and implied volatility are rising in tandem. This pattern suggests that investors are becoming increasingly concerned over key trade policy developments over the coming months and therefore increasing hedging activity. 

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