Report Date: August 31, 2025
August 2025 was the month the options market collectively decided to take a nap. The VIX hit its lowest level of the year at 14, the S&P 500 kept grinding to new highs, and traders priced in almost zero volatility. If you’ve been in this game long enough, you know what that usually means: something’s coming.
But first, let’s talk about what actually happened, and what the options market was quietly telling us beneath the surface calm.
The Big Picture: Complacency or Confidence?
August delivered exactly what nobody expected after the tariff chaos of April: a steady, methodical march higher with volatility collapsing to levels we hadn’t seen since late 2024. The S&P 500 gained 1.9% for the month, bringing year-to-date returns to 9.84%, while the VIX spent most of the month in a coma, trading below 15 and touching 14.27 on August 22nd, the lowest level since Christmas Eve.
Here’s the thing that bothered me all month: record option volumes paired with historically low volatility. That combination doesn’t usually persist. Either volume drops when nothing’s happening, or volatility picks up when everyone’s trading. But in August, we had heavy volume with pricing that suggested nothing would ever move again.
Volume Characteristics: High Activity, Low Expectations
Options volume remained robust throughout August, but the composition shifted in interesting ways. While absolute volume stayed elevated, the nature of trades changed significantly from earlier in the year.
0DTE trading: Still extremely popular, but we saw a notable shift toward more calendar spreads and iron condors. Traders weren’t betting on big moves, they were betting against them. When you see a surge in short-volatility strategies during a calm market, that’s usually late-cycle behavior.
Weekly options: Activity remained strong, but implied volatility for weeklies compressed to levels that made buying them almost pointless unless you expected a 2%+ move. Most weeks, the S&P 500 moved less than 0.5%, so premium sellers cleaned up.
Monthly and quarterly options: This is where it got interesting. While near-term IV was dead, we saw accumulation in October and November expirations. Smart money was buying time, not betting on immediate volatility, but preparing for it down the road.
The Volatility Paradox: VIX at 14 While Markets Hit All-Time Highs
Let’s talk about that VIX level. At 14, the market was pricing in essentially zero chance of anything bad happening. The historical average VIX is around 20, so at 14 we were 30% below normal, during a year with unprecedented tariff uncertainty, slowing economic growth, and an election cycle heating up.
What gives?
Three factors drove the VIX crush:
1. Fed clarity: After months of uncertainty, Powell’s Jackson Hole speech on August 22nd effectively confirmed a September rate cut was coming. Markets hate uncertainty more than they hate bad news. Once the path was clear, volatility evaporated.
2. Tariff stabilization: The reciprocal tariffs were in place, the August 1st deadline passed without major escalation, and companies adjusted. The uncertainty around whether tariffs would happen was gone, now it was just about managing the new reality.
3. Earnings beats: Q2 earnings came in stronger than expected across the board. Companies proved they could absorb tariff costs without cratering margins. Record revenues, solid guidance (especially from retailers), and resilient profit margins calmed nerves.
But here’s what the low VIX wasn’t telling you: realized volatility was even lower, at just 5.9%, a one-year low. The SPX 1-month implied-realized spread widened to the 99th percentile. Translation: options were actually expensive relative to how much the market was actually moving, despite the low absolute VIX level.
Professional volatility traders noticed this. We saw increased selling of near-term premium and buying of longer-dated volatility, a classic “sell what’s overpriced now, buy what’s underpriced later” setup.
Sector Rotation: What the Options Market Revealed
The August options market told a very specific story about where professional money was positioning:
Technology: Selective Optimism
Tech had the most interesting options activity. While the sector performed well overall, the options flow was highly bifurcated:
Big Tech calls: Heavy accumulation in MSFT, GOOGL, and META as AI enthusiasm remained intact. These weren’t lottery tickets, they were in-the-money and at-the-money calls with September through November expirations. Institutional positioning, not retail speculation.
Semiconductor caution: NVDA options showed increasing put protection. After the massive run, smart money started hedging. The put skew in NVDA steepened significantly in the final week of August as traders positioned ahead of earnings scheduled for the 28th.
Apple intrigue: AAPL options showed an unusual pattern, very little activity until the last week of August when call volume surged. Whispers about strong iPhone demand and potential China progress drove this late-month positioning.
Financials: Quiet Confidence
Bank options were boring, which was actually a good sign. Low volatility, moderate volume, and steady price appreciation suggested confidence in the sector. Large banks benefited from higher-for-longer rates keeping net interest margins healthy, and option traders weren’t worried about credit quality deteriorating.
The lack of drama in financial options was notable precisely because it was so different from the panicked hedging we saw earlier in the year.
Healthcare: The Forgotten Sector
Healthcare was the worst-performing sector YTD, down 3.87%, and options activity reflected the abandonment. Volume was anemic, volatility was low, and nobody seemed to care. When options traders ignore an entire sector, that’s usually when value investors start paying attention.
The healthcare insurance names in particular saw almost no options interest, a remarkable change from earlier in the year when Medicare Advantage concerns dominated headlines.
Materials: The Tariff Beneficiaries
This was August’s surprise. Materials gained 5.59% and showed strong options activity, particularly in companies exposed to infrastructure spending and domestic production. Call buying in steel, copper, and construction materials names suggested traders were positioning for a multi-quarter trend, not a one-month pop.
The Powell Pivot: August 22nd and the Volatility Wipeout
Let’s zoom in on the most important day of the month: August 22nd, when Powell spoke at Jackson Hole.
Going into the speech, the VIX was already low at 15. Powell essentially confirmed what the market wanted to hear: the Fed would start cutting in September, prioritizing employment over inflation concerns. The market surged 1.5% that day, and the VIX collapsed to 14.27.
But here’s what the options market told us in the hours and days after: while equity prices rallied, options traders immediately started selling near-term calls and buying longer-dated puts. The message? Great news is priced in, now we’re vulnerable.
Looking at the options order flow that day and the following week:
- Near-term call volume spiked (retail FOMO)
- Longer-dated put volume increased (professional hedging)
- Volatility term structure inverted briefly before normalizing
This divergence between short-term euphoria and longer-term caution was one of the most important signals August gave us.
Put/Call Ratios: The Hidden Warning
Throughout August, despite the market making new highs, the equity put/call ratio stayed elevated, consistently above 0.80 and often approaching 0.90. In a truly euphoric, complacent market, you’d expect this to drop to 0.60-0.70 as retail piles into calls and nobody bothers with protection.
That didn’t happen.
Professional traders kept their put hedges on. Every time the VIX dropped below 15, we saw increased put buying from institutional desks. They weren’t panicking, they were methodically maintaining protection because the market felt too good to be true.
The index put buying was particularly notable in the final week of August, with October SPX puts seeing heavy volume. These weren’t lottery tickets at extreme strikes, they were 5-10% out-of-the-money puts, the kind you buy when you’re not sure when something might happen, but you want to be protected when it does.
Interest Rate Options: The Quiet Boom
One area that didn’t get enough attention: interest rate volatility collapsed to multi-year lows. The MOVE Index (bond market’s equivalent of the VIX) fell to a three-year low as rate cut certainty increased.
This had a cascading effect on options strategies. Many sophisticated traders use rate vol to hedge equity vol. When rate vol is this cheap, it makes certain cross-asset strategies very attractive. We saw increased usage of rate options as a cheap hedge for equity positions, a technical detail, but one that mattered for how institutions were managing risk.
International Markets: A Different Story
While U.S. markets were calm, international options told a more volatile story:
Emerging markets: Options on EM indices showed elevated volatility as tariff impacts varied widely by country. The India tariff situation in late August created spikes in volatility that U.S. traders mostly ignored.
European options: Showed more concern than U.S. counterparts. Economic growth worries and political uncertainty kept vol elevated relative to U.S. markets. Smart traders were using this disparity, selling rich U.S. vol and buying cheap European vol as a relative value trade.
Asia: Chinese equity options remained volatile as property sector concerns persisted. The contrast between calm U.S. markets and jittery Asian markets was stark and created opportunities for those watching both.
Commodities and Crypto: Options Tell the Story
Gold options: This was fascinating. Gold made new highs in August, and options activity surged. GLD options hit record volumes multiple times, with the 1-month implied volatility spiking to a five-year high of 30%. Traders were aggressively buying gold call options, betting on further strength. The skew became inverted, calls more expensive than puts, a rare occurrence that suggests strong directional conviction.
Oil options: WTI crude oil volatility was elevated due to Middle East tensions, with 1-month IV reaching 68% before settling around 51% by month-end. The vol spike didn’t persist, but it created trading opportunities for those quick enough to capitalize.
Bitcoin options: Crypto volatility started developing stronger correlations with the VIX, suggesting Bitcoin is increasingly being treated as a risk asset rather than a unique asset class. When the VIX dropped in August, Bitcoin vol dropped too. This convergence matters for portfolio construction and hedging strategies.
What Worked, What Didn’t
Strategies that crushed in August:
- Selling near-term premium (iron condors, credit spreads)
- Short volatility ETPs (VXX shorts, XIV-style positions)
- Covered call writing on blue chips
- Calendar spreads (long back month, short front month)
Strategies that struggled:
- Buying outright calls or puts (premium decay was brutal)
- Long volatility positions
- Directional bets (market mostly chopped sideways)
- Aggressive delta strategies
The month rewarded patience and punished speculation. Options buyers needed huge moves to overcome the low volatility environment, and those moves mostly didn’t materialize.
The Warning Signs Nobody Talked About
Beneath the calm surface, August gave us several warning signs that sophisticated traders noticed:
1. Record high SPX while VIX at yearly lows: This combination has historically preceded corrections. Not always immediately, but eventually.
2. Negative correlation breakdown: There were multiple days where SPX rose and VIX rose together, a historically rare event that happens when markets are transitioning from one regime to another.
3. Skew compression: The put skew in SPX options, the extra cost of downside protection, compressed significantly. When put protection gets cheap during a rally, it’s usually because complacency is peaking.
4. Smart money accumulation of October/November protection: While retail was buying September calls, institutions were buying October and November puts. They were looking past the immediate euphoria.
Looking Ahead: What August Set Up for September
The August options market was essentially telling us: “Enjoy this calm, because it won’t last.”
The specific setup going into September:
- Extremely low volatility that could snap back quickly
- Heavy institutional put buying for October/November suggesting concern about post-Fed-cut environment
- Overpriced near-term premium relative to realized vol
- Underpriced longer-term premium relative to upcoming event risk (elections, earnings, potential fiscal issues)
The September Fed cut was priced in, that was clear. What wasn’t priced in was the aftermath. The options market seemed to be betting that once the Fed cut, reality would reassert itself and volatility would return.
Lessons from August 2025
For options buyers: Don’t chase low volatility. When the VIX is at 14 and everybody feels safe, that’s exactly when you should be most cautious about paying for options. Either wait for vol to spike or use spreads to reduce your cost.
For options sellers: August was a premium seller’s paradise, but those conditions don’t last forever. The smart premium sellers were booking profits and reducing position sizes as the month progressed, not getting more aggressive.
For portfolio managers: The divergence between near-term calm and longer-term concern was the key signal. Your portfolio should have reflected both: maintain your long exposure to capture the rally, but don’t abandon longer-dated protection just because one-month vol is cheap.
Final Thoughts
August 2025 will be remembered as the month the market forgot how to be afraid. The VIX at 14, new all-time highs in the S&P 500, and traders pricing in almost zero probability of anything going wrong.
History suggests this never ends well. Not because something has to crash immediately, but because markets that price in perfection are vulnerable to disappointment. And disappointment doesn’t need to be a crisis, it just needs to be anything other than the best-case scenario already priced in.
The smart money in the options market spent August doing exactly what you should do in calm markets: taking profits on short-vol positions, building longer-dated protection, and positioning for the volatility that always, eventually, returns.
The question wasn’t if volatility would come back. The question was when, and what would trigger it.
September would provide some answers.
Data sources: CBOE market statistics, public market data, and aggregate volume reports. This report is for educational purposes and does not constitute investment advice. Options trading involves substantial risk and is not suitable for all investors.