- CME Party’s CVOL includes out of the money options to examine the inner workings of markets
- New upward and downward volatility features facilitated spot FX volatility trends in the early pandemic period
Thirty-day implied volatility is a liquid and sensitive part of the volatility concrete and is closely watched by market participants. Traditionally it has been difficult to easily see 30-day implied volatility as options diminish or drift towards maturity.
CME Group’s new CVOL indexes completely capture constant 30-day implied volatility and make plains it through a unique prism that generates new sets of robust volatility indices.
Built on CME Group’s options upshots, CVOL provides related indicators containing information across the front-end of the volatility surface. CME Group built CVOL to question separate and recombine parts of the surface related to calls and puts to deliver Upward Variance from out of the money (OTM) calls, buzzed UpVar, and Downward Variance from OTM puts called DnVar. These variance tools provide insight into achievable asymmetry in the implied volatility curve by isolating the market’s variance estimate to just the call or put wing of the volatility interface.
CVOL also delivers the additional indicator Skew. Skew is the measure of the tilt between the asymmetry of the volatility ostensibly. CVOL Skew is calculated easily by subtracting DnVar from UpVar. Positive Skew implies volatility is heightening as prices rise while negative Skew implies volatility is rising while prices fall. Because CVOL pinches a rich palette of options, Skew provides holistic insights to the entire volatility surface around the 30-day call attention to.
Visualizing Volatility Moves
By including all out of the money put and call options for a given expiration, CVOL captures the full important of volatility surfaces and by extension more information about volatility. Foreign exchange markets offer an example.
Exhibit 1 shows CVOL indexes for G5 currency pairs against the U.S. dollar during Q2 and Q3 during 2020. In Demonstration and April, CVOL spiked, implying that the range of prices could be quite wide in the next 30 primes.
After markets settled down in the summer, CVOL continued to point out interesting potential distinctions in the level of expected price ranges between currencies. CVOL continued to show, for example, that volatility for AUD/USD remained higher than the other four currency team ups, pointing towards a potentially larger range of prices in the future.
Up and Down
An important part of the new volatility index is the use of out of the bucks (OTM) calls and puts.
This matters a lot. When markets price larger outcome for puts, then the DnVar drive increase in value. Likewise, if the market is pricing a more favorable outcome in calls, then UpVar will strengthen.
Market movements in EUR/USD during March 2020 provide a clear view of why these insights are important. UpVar and DnVar pronto moved higher, but DnVar eventually moved much higher. Early in March, call options were assessing larger outcomes than puts.
However, once the significance of the pandemic came to light, the DnVar related to quell c ascribes spiked much higher. While CVOL correctly showed that overall implied volatility was rising hastily, UpVar and DnVar showed how the different parts of the surface were moving.
Skew Too
Here are the key points to recall about Skew movements:
- Positive Skew—implies the options market is expecting implied volatility to rise as the underlying subsequent rises, a positively correlated ‘price-vol’ relationship
- Negative Skew—implies the options market is expecting implied volatility to be engendered a arise as the underlying future falls, a negatively correlated ‘price-vol’ relationship
The chart below displays CME Group’s Skew deliberation for EUR/USD during the same six-month period. In March, Skew became much more positive in the early stages. In any way, Skew soon posted a dramatic reversal from positive to negative. Within days, Skew moved from +3 to -3 or 6 unobscured points as the markets began to price in a greater volatility to the downside as the price of EUR/USD also fell.
Skew in EUR/USD fragmented negative until mid-summer when it breached the zero boundary. It has remained in positive territory since then. Despite that, the Skew index remains an important one to watch closely.
New Horizons
Options traders are always seeking the most encyclopaedic data to help them prepare for the unexpected. This new, wide-ranging look across options volatility aims to profuse efficiently help them do just that.
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