The CME Group Volatility Index (CVOL) estimates volatility across different asset classes and markets. It’s based on options prices on futures and uses the implied volatility curve over a given expiration. The index assigns equal weighting to strikes across the curve, options premiums are plotted on the y-axis and strikes on the x-axis, the area underneath the combined curves is considered to arrive at the the variance estimate, producing a more representative measure of the market’s expectation of 30-day forward risk.
While CVOL provides a holistic view of the implied volatility curve, the CVOL suite also offers some supplementary indicators to provide more colour to the structure of the curve; DnVar, UpVar, Skew and Convexity.
Table 1
A TRADITIONAL RISK REVERSAL MEASURE OF SKEW WOULD CONSIDER THE 25 DELTA PUT VS THE 25 DELTA CALL IMPLIED VOLATILITIES.
Source Quikstrike
A traditional risk reversal measure of skew would consider the 25 delta put vs the 25 delta call implied volatilities. However, just as CVOL uses all of the available data under the curve, the skew is calculated buy using all of the puts (down variance - DnVar) and calls (up variance - UpVar). The skew is referenced in two metrics, the difference between UpVar - DnVar or the ratio (UpVar / DnVar).
DnVar is calculated by doubling the area under the left side, below the at-the-money strike, and using the same variance calculations as CVOL. Similarly the UpVar calculation is done for everything under the curve, above the at-the-money strike.
Convexity gives us an understanding of the curvature of the volatility curve, and is a comparison of at-the-money and out out-of-the-money volatility levels. With zero convexity the volatility curve would be a flat line with implied volatilities the same at all strikes. Assessing the curvature can be done by subtraction or division (CVOL / at-the-money volatility) to generate a ratio. The CVOL convexity measure considers the ratio.
CVOL introduces a slightly different way of assessing and digesting the implied volatility structure, a more holistic view that is easily comparable between different asset classes.
CVOL can be accessed in QuikStrike via the CME Direct platform.
Ryan Easterbrook E:
ryan.easterbrook@admisi.com T:+44(0) 20 7716 8054
17 | ADMISI - The Ghost In The Machine | Q4 Edition 2024
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