VOLQ futures offer an efficient way for market participants to express a view on forward volatility of the Nasdaq-100 Index. Let’s review one trade example showing how investors can use the VOLQ futures contract.

Example: Expressing a view on volatility

A portfolio manager believes that price action in Nasdaq-100 constituent companies has led to unusually high volatility assumptions being priced into index options. The portfolio manager considers an option trade to express her bearish stance on Nasdaq-100 Index volatility, but would like to forego directional index exposure, and the active management of delta, theta, and gamma risks.

Further, she is looking to establish this position with one trade, while maintaining flexibility to alter the trade’s time horizon. Assuming it’s the beginning of November, the portfolio manager sells 5 November VOLQ futures contracts at a price of 20.

With a contract multiplier of $100, the market value of this position is $10,000. Given a profit target of 18 for this position, the profit potential is $1,000.

This short position in VOLQ futures represents a bearish position on the forward volatility of the Nasdaq-100 over a 30-day window. In this case, that window is November 18 through December 18. November 18 is the expiration date of the futures contract, and December 18 is 30 days later.     

As the November VOLQ futures contract approaches expiration, the portfolio manager does not see the expected decrease in volatility as she anticipated. However, she still feels confident that volatility expectations should decrease in the coming days and weeks.

Rolling a VOLQ futures position

Instead of carrying her November futures position into expiration, she decides to roll the position to the December VOLQ contract for a slight loss. The portfolio manager rolls her short November volatility exposure to December with one convenient trade – selling the November/December calendar spread. She liquidated her November position and extended her exposure to December.

Our trader currently has a loss of half an index point in November, and she should have a similar profit and loss (P&L) statement after the roll.

As December expiration approaches, volatility is indeed moving lower, and the portfolio manager looks to close her short December position for a profit. The portfolio manager covers her short December VOLQ futures position at 19.50. Her forecast was eventually proved correct, and she was easily able to adjust her trade to allow her forecast to develop. 

Summary

VOLQ futures can offer an efficient instrument to express a view on or hedge exposure related to the forward volatility of the Nasdaq-100 Index.

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