March Volatility Brings Increased Risk and Opportunity
U.S. markets experienced a significant shift in sentiment in March as February’s late-month decline of 3% rapidly grew into a technical correction of more than 10% for broad averages. This stung equity investors and set off recession alarm bells among analysts and market pundits.
In the options markets, a rapid selloff after a relatively long stretch of calm coincides with an increase in volatility as the equilibrium shifts and uncertainty increases. This impacts option pricing and market dynamics in several ways and may present opportunities for traders who understand these dynamics and can anticipate potential outcomes.
Implied vs Realized Volatility
At the most basic level, large market moves typically lead to higher realized volatility, which is simply a measure of the magnitude of daily changes in an asset. If a market that typically moves 1% per day suddenly starts to move 2% per day, realized volatility doubles. Because realized volatility is a starting point for estimating future volatility, and future volatility is the primary unknown in most options pricing models, significant changes in realized volatility quickly impact market prices. As shown in the Cboe LiveVol platform, these dynamics have been evident in March so far as realized volatility climbed due to sharp daily moves, prompting a corresponding rise in implied volatility — a reflection of traders' revised expectations for the future.
Source: Cboe LiveVol March 2025
SPX® Implied Volatility
Source: Cboe March 2025
One important factor to consider is the impact of volatility on options of different durations. As shown in the snapshot above using Cboe data, volatility shocks are much more pronounced in shorter-term options than longer-dated contracts. This reflects the observed behavior that markets eventually calm down after periods of volatility- reverting to some approximate mean once crises have passed and new information has been integrated into underlying asset prices. At the peak of March’s volatility, short-dated volatility had nearly doubled compared to month-end, while the one-year implied volatilities were up about two points, or about 12%.
The term structure of volatility is an important measure of market sentiment. Traders refer to the typical upward-sloping term structure — where longer-dated volatilities are higher — as 'contango.' When short-term volatility exceeds longer-term volatility, the curve is said to be 'in backwardation,' a signal of acute short-term uncertainty. In addition to real-time and historical visualizations in platforms like Cboe LiveVol and Trade Alert, Cboe publishes a number of VIX® Index measures for different terms, ranging from one day to one year which can be used to assess the impact of volatility shocks across time horizons.
In market environments like this, the shape of the implied volatility skew (or smile) that shows the equilibrium pricing of out- of-the-money puts compared to out-of-the-money calls is another insightful measure of sentiment. Mathematically, this curve maps to a distribution of probabilities, so changes at one end of the smile imply changes in the implied probabilities of moves in the corresponding direction. As the selloff has accelerated so far in March, volatilities in these puts have risen more sharply than those of similar calls, indicating heightened concern about downside risks among traders.
SPX Historical Skew
Source: Cboe Trade Alert March 2025
Monitoring the volatilities of 25 delta puts versus calls is an easy way to track changes in the skew. As shown in this snapshot, the market decline in the first part of March was accompanied by a notable rise in skew, from 5.8 to 7.7 points of volatility between the contracts, corresponding to a higher probability of a move lower based on market prices. While this type of move is common, experienced traders know that in many cases, this knee-jerk reaction is a red herring akin to trying to buy home insurance when your house is already on fire— costly and simply too late to avoid much of the pain.
Volatility of Implied Volatility
While a bit more complex, another metric worth watching is the volatility of implied volatility itself, which can be used to gauge demand for hedges such as VIX Index options, often used by the largest portfolio managers. Cboe provides the VVIX Index calculation, which applies the VIX Index methodology to VIX Index options. As shown in the LiveVol snapshot, the VVIX Index peaked on March 11, immediately following the worst day of the month, possibly indicating a moment of capitulation given the intensity of the week.
Source: Cboe LiveVol March 2025
Put/Call Volume Ratio
Directly related to all these sentiment indicators is the examination of positioning and order flow. Most traders are familiar with the simple Put/Call volume ratio, which broadly represents market activity. Indeed, among all single stocks this ratio surged in early March as markets dipped, reflecting a greater focus on contracts traditionally used to hedge long positions.
Source: Cboe Trade Alert March 2025
Stepping beyond the traditional Put/Call ratio, many traders pay close attention to large trades and accumulated positions. Option volume in SPX and VIX Index options has reached record levels in March, with nearly 4 million SPX options and 1 million VIX Index options trading per day. Because these products are widely used by large portfolio managers to hedge and adjust market exposure, they provide valuable insight into which scenarios and market levels may be of greatest interest going forward.
Source: Cboe Trade Alert March 2025
As shown in the Cboe Trade Alert snapshot above, the largest changes in positions involve VIX Index options calls and SPX Index options puts. The underlying data adds context to confirm that the largest VIX Index options call positions were buyer-initiated, while the largest SPX Index options puts were a vertical spread seller, possibly capitalizing on the increased demand for downside protection.
In conclusion, the March selloff may have rattled the broader market, but for volatility-savvy traders, the chaos followed a familiar playbook: realized volatility increased, term structure flipped into backwardation, skew steepened, the VVIX Index increased, and major positions shifted accordingly.
The real madness wasn’t in the volatility itself — it was in the reaction to it.
For traders who understand the data and stay focused amid the noise, March’s moves weren’t a shock, they were an opportunity in disguise.
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