Options Market Sentiment Shift: Hedgers Capitulate Amid Fed Uncertainty

This analysis is based on the Seeking Alpha report [1] published on November 4, 2025, which examines the capitulation of hedgers and rising bullish sentiment in options markets following the October 29, 2025 Fed meeting.

The options market is experiencing a dramatic sentiment shift characterized by “hedgers capitulating” as bullish sentiment rises to notable levels [1]. The most striking development is the dramatic flattening of SPX skew, which fell from the 99th percentile high three weeks ago to a low of 6th percentile earlier last week, before ending at the 48th percentile [1]. Longer-dated skew screens even cheaper, with SPX 6-month skew now in the 16th percentile low, suggesting a significant reduction in demand for downside protection.

This flattening in index skew correlates with increased bullish sentiment in single-stock options. The number of stocks in the S&P top 100 trading with inverted call skew (indicating extremely bullish sentiment) has surged to 20%, versus a historical average of just 3% [1]. While not yet at the extremes seen in 2021 or late 2024, this signals a high level of investor optimism heading into year-end.

The market context reveals complex volatility dynamics. Macro volatility declined following the Fed meeting, with both rates and FX volatility falling to one-year lows after the FOMC [1]. However, equity and credit volatilities increased week-over-week, with the VIX® index gaining 1.0 point despite market rallies [1]. Current market data shows the VIX trading at $20.13, up 17.24% from the previous close of $17.17 [0], reflecting the “spot up, vol up” phenomenon.

Recent market performance shows all major indices finishing lower on November 3: S&P 500 down 0.44% to 6,851.97, NASDAQ Composite down 0.49% to 23,834.72, Dow Jones down 0.76% to 47,336.69, and Russell 2000 down 0.40% to 2,471.24 [0]. This creates a divergence between bullish options sentiment and cautious equity market behavior.

: The October 29, 2025 Fed meeting created significant policy uncertainty that appears to be driving these complex market dynamics. Fed Chair Powell stated that “a further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it” [2]. Two members dissented from the rate cut decision, reflecting “strongly differing views about how to proceed in December” [2].

: The market is displaying several contradictory signals that warrant attention:

• Bullish options sentiment with 20% of S&P 100 stocks showing inverted call skew [1]
• Elevated VIX levels with a 17.24% increase to $20.13 [0]
• Declining major indices across the board [0]
• Defensive sector rotation with Consumer Defensive leading at +1.39% while Technology lags at -0.74% [0]

: While the current bullish options sentiment at 20% is below the extremes seen in 2021 or late 2024, it remains significantly above the 3% historical average [1]. This elevated level of optimism, combined with Fed uncertainty and elevated volatility, creates conditions for potential market reversals.

The analysis reveals several risk factors that warrant attention:

: The current bullish options sentiment at 20% of S&P 100 stocks (versus 3% historical average) [1] may represent a contrarian signal. Historical patterns suggest that such extreme bullish sentiment often precedes market corrections, particularly when combined with elevated VIX levels and policy uncertainty.

: The December 10 Fed meeting timeline creates a decision-making window where market sentiment could shift rapidly based on economic data releases and Fed communications. The divergence between Fed members on December policy adds to this uncertainty [2].

: The divergence between options market bullishness and equity market caution, combined with Fed policy uncertainty, creates conditions for rapid sentiment reversals. The elevated VIX despite market rallies suggests underlying market stress [0].

Key factors to monitor include:

1. Fed Communications
   : Watch for changes in Fed rhetoric leading to the December 10 meeting
2. Volatility Term Structure
   : Monitor whether VIX term steepening or flattening continues
3. Options Flow Data
   : Track institutional vs. retail positioning in options markets
4. Economic Data Releases
   : Key inflation and employment data could sway Fed decision-making
5. Sector Rotation Patterns
   : Whether defensive positioning continues despite bullish options sentiment

The options market is experiencing a significant sentiment shift with hedgers capitulating as bullish sentiment rises to 20% of S&P 100 stocks showing inverted call skew [1]. SPX skew has flattened dramatically from the 99th to 48th percentile, suggesting reduced demand for downside protection [1]. This occurs amid declining macro volatility following the Fed meeting, though equity volatility remains elevated with the VIX up 17.24% to $20.13 [0].

The market is displaying contradictory signals between bullish options sentiment and cautious equity markets, with all major indices finishing lower on November 3 [0]. Fed policy uncertainty surrounding the December 10 meeting appears to be a key driver of these complex dynamics, with Powell stating that a December rate cut is “not a foregone conclusion” [2].

The current environment presents elevated risk due to the combination of extreme bullish sentiment, policy uncertainty, and elevated volatility levels. Historical context suggests such conditions often precede market reversals, though the current sentiment levels remain below the extremes seen in 2021 or late 2024 [1].