In recent years, volatility has increasingly become a focus for market participants. Not only as a concept but also as a tradeable instrument. Investors are increasingly looking for ways to protect returns from an array of volatile events ‒ ranging from earnings seasons, to market shifts, to uncertainty around political events. Given such a wide range of events and opportunities, traders need innovative tools to hedge and express market opinions.
What if there were an instrument that allowed market participants to express a view solely on volatility but without having to manage interest rate changes, time decay, or delta and gamma hedging?
As a result of the partnership and collaboration between CME Group and Nasdaq, such a product now exists – introducing Nasdaq-100 Volatility Index (VolQ) futures. Let’s first review the underlying Nasdaq-100 Volatility Index. The index measures 30-day implied volatility of the Nasdaq-100 Index, as expressed by listed cash-index options on the Nasdaq-100. Meaning, it will always look at volatility 30 days into the future from the current day.
This is achieved by using option prices from the nearest four consecutive weekly expiration dates. For each of these expiration dates, the first two put and the first two call strikes above and below the at-the-money forward price are used.
These 32 option prices are then used to calculate an index level that represents the implied volatility level of a precisely at-the-money Nasdaq-100 Index option with 30 days to expiration.
While the Nasdaq-100 Volatility Index measures market expectations of current volatility, let’s look at how VolQ futures represent the market’s opinion of forward volatility.
Forward volatility is a measure of the market’s expectation of volatility between two defined dates in the future. VolQ futures prices will track this expectation.
As an example, let’s look at a VolQ futures contract that expires on November 18. That futures contract price will represent the expectations of Nasdaq-100 Index implied volatility for the window between November 18 and December 18 ‒ regardless of what day that futures contract is traded.
Similarly, the VolQ futures contracts that expire on December 16 would represent the expectation of volatility between December 16 and January 15.
Consider another way to look at this, the expiration date of the futures contract is the start of the volatility window the contract is measuring – which never changes during the life of the futures contract.
Some ways to incorporate VolQ futures into your trading strategies include:
VolQ futures have a $1000 contract multiplier. Assume that VolQ futures are trading at 16, the notional value of one futures contract would be $16,000. The minimum price increment of the VolQ futures contract will be 5¢, making the value of one tick equivalent to $50. VolQ futures will be listed monthly and will be financially settled at expiration, which generally occurs on the third Wednesday of the contract month. The final settlement price will be determined by Nasdaq’s proprietary VolQ index methodology.
The futures will be available to trade on Globex from Sunday afternoon through Friday afternoon ‒ nearly 24 hours per day. Also, please note that VolQ futures will be block eligible. Additionally, margin offsets will be available for those interested in trading or spreading VolQ futures versus other CME stock index products. Detailed information can be found on the Contract Specifications page.
VolQ futures offer an efficient way for market participants to express a view on the forward volatility of the Nasdaq-100 Index ‒ offering investors and traders a futures contract focused exclusively on volatility.