Options Quarterly Commentary Q3 2025

US equities posted strong gains in Q3 2025, setting multiple record highs. The rally was fueled by easing trade tensions, resilient economic data, robust corporate earnings, and continued optimism around artificial intelligence growth. This was further supported by the Federal Reserve initiating a new rate cutting cycle with a 25bp cut at its September meeting, whilst signaling further easing ahead. ‘’Magnificent Seven’’ stocks continued to lead the market, with the information technology sector advancing 13.2%. Corporate earnings growth for the S&P 500 reached 12%, well above expectations of 7%. In addition, markets saw record-setting rallies in both gold and silver. The S&P 500 Index: SPX ultimately closed at 6688.46 (+8.1% vs Q2 2025). Volatility was moderately choppy, with the VIX moving within a 7.78 point range for the quarter. The biggest move was driven by the sharp downward revision to U.S payroll data (for May and June) on August 1, causing the VIX to spike to 20.38. The CBOE Volatility Index: VIX closed at 16.28 (down -2.7% vs Q2 2025). 

_{Source: Bloomberg}

Volatility compression occurred throughout the quarter alongside the steady climb in equities. SpotGamma attributed this low-vol regime to heavy positive dealer gamma positioning as a result of 0DTE flows, dampening market movement. 0DTE options-selling forces dealers to hedge by buying into declines and selling into rallies, explaining the drop in realized volatility as the market achieved all-time highs.

The options market showed little concern ahead of the September FOMC meeting, implying only a 0.7% swing in either direction, the second lowest projection in 18 months (Susquehanna).  Post meeting, options activity surged led by single stocks, reaching a record high of 54 million contracts traded on September 19. A large portion of this was call buying which pushed the put-call ratio down to a three- month low of 0.45 (CBOE), highlighting a strong bullish sentiment. This was further reflected in the proportion of stocks trading with inverted call skew which is typically a sign of elevated optimism (see below).

_{Source: CBOE}

US listed options volumes reached new all-time highs in Q3, averaging over 53 million contracts per day. It was noted by NYSE that the customer segment (as opposed to market makers) now accounts for nearly 46% activity, the highest share since late 2021. FLEX options also saw robust growth, with 1.2 million contracts traded daily (NYSE).

Towards quarter-end, volatility compression began to reverse with markets entering a ‘’spot up, vol up’’ dynamic, where the S&P reached all-time highs and volatility simultaneously rose. Investor sentiment wavered amid concerns around a government shutdown causing the SPX 1m implied-realized vol spread to double to 5.0% (76% percentile), indicating a growing gap between implied and realized volatility (CBOE).

The five-year average correlation between the SPX and the VIX is -0.88 (Bloomberg), reinforcing that rising equity markets typically coincide with lower volatility. When this relationship breaks down, as it did on 10% of trading days in 2025 so far, it often signals markets are overheated (Nomura). Nomura highlighted that this breakdown tends to occur when investors are heavily positioned in equities and a further rally increases downside hedging demand, which steepens put-call skew and drives the VIX index higher. Conversely, if investors are underexposed, a rally can spark a rush to buy. They note that in this instance the latter occurred, and an elevated call skew increased demand for call spreads, most notably in technology stocks.

As we head into Q4 and year-end, there has been a noticeable uptick in demand for protection, indicating that investors are looking to lock in gains and hedge against potential drawdowns. Tail hedging has picked up significantly, evidenced by the S&P 500 3-month 25-delta skew steepening from the 40th percentile to 70th percentile (CBOE). There was a sizeable VIX options trade on September 29 where one market participant bought 113,000 contracts of VIX November $32 calls, spending a total of $9.7 million in premium (Bloomberg).

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