Investment Committee - October 2025

A New Lens for Risk and Correlation

The Investment Committee’s October 2025 meeting centered on significant shifts in both macroeconomic policy and market structure. Our analysis confirms a crucial change in attention from the Federal Reserve, which is now prioritizing the labor market over inflation expectations. Simultaneously, we are observing unprecedented levels of short-term options trading and targeted speculation. This article details these shifts and identifies the ultimate risk factor for year-end portfolios: the critical need to aggressively monitor correlation dynamics within our holdings.

Shifting Focus: From Inflation Expectations to the Labor Market

Following our Investment Committee’s last meeting, members discussed how they deem it important for our investors to ignore inflation expectations for the time being and instead focus on the labor market. The consensus is that the U.S. Federal Reserve (Fed) has already made this shift—a trajectory evident since the Jackson Hole summit last August.

The discrepancy between 2-year U.S. dollar yields sliding lower and inflation breakevens edging higher this year is a clear signal that the market has taken notice of this shift in the Fed's attention and is quick to concentrate on employment numbers.

With Fed officials now offering somewhat clearer language on what matters to them, we believe markets feel more comfortable adding risk to their books. Hence, volatility has dropped across the board. Low volatility is now not only an equity-specific phenomenon but a global macroeconomic event.

Idiosyncratic Speculation and Trading Dynamics

Other signals we deem important towards year-end include the extreme rise of option volume in meme stocks. The stock of Opendoor ($OPEN) is a perfect example. Opendoor's option volume has recently dwarfed that of the Magnificent 5 (Apple, Microsoft, Meta, Google, and Amazon) combined and is constantly printing sizes similar to that of the SPY (S&P 500 ETF). The stock rose from $0.50 in June to $10.50 in September.

Members discussed how this might signal a new mania but were quick to reject such claims. Despite the option activity in these meme stocks being definitively speculative, the Committee did not observe broader spillover into other names. This is very different from the 2021 meme craze, when speculative call buying extended to a wider band of the market. For example, over 30% of the S&P top 100 names traded with inverted 3-Month call skew in 2021 (a sign of extreme bullish sentiment). Currently, it’s only about 5%.

In other words, the current meme craze is still an idiosyncratic phenomenon, not a sign of broader market exuberance.

The Rise of Zero-Days-To-Expiry (0DTE) Options

Another clear trend we are following at KM Cube, and we believe is here to stay for many years, is the rise of zero-days-to-expiry (0DTE) options. Options that expire at the end of each working day in the U.S. now compile to 62% of the cumulative volume for all options traded—a new record for any market.

Retail participation is the dominant factor behind the rise of 0DTEs. This fact on its own is remarkable. In Europe, options volume has remained flat for many years and is actually dipping somewhat lower in 2025. Yet, in the U.S., retail investors have become so sophisticated that they are leading very-short-term option activity.

The Put/Call ratio in all other options (non-zero days to expiry) persistently orbits ∼1.8. This means that put protection to the downside is more heavily traded, justifying the volatility premium ascertained by academics and practitioners alike. But for 0DTEs, the Put/Call ratio is persistently ∼1.00. This indicates that retail interest is evenly distributed between calls and puts; some find hedging usage in them, while others may speculate or target to earn a quick carry. All the above are helpful channels of information, which ultimately bring markets into equilibrium.

Conclusion

What will it take to break this current market balance? Our Investment Committee thinks that since the vast majority of portfolios are built on the assumption that diversification is beneficial, how one analyzes correlations between stocks or different assets is paramount. Diversification broadens exposure; it is not a free lunch. If one hasn’t studied correlations among their portfolio holdings during bad markets, they are up for a rude awakening. Many times, these correlations—and someone mentioned rising correlation volatility—can prove a predictive indicator.

We will therefore be watching this metric like a hawk to be swift in detecting potential market nervousness towards year-end. Maintaining vigilance on correlation dynamics, alongside the Fed’s focus on employment and the structural changes evident in options trading, will be key to navigating the final quarter of 2025.

Authors: John Couletsis and Kostas Metaxas