As a key indicator of forward risk expectations, implied volatility (IV) is valuable input for trading and risk management systems and strategies. But for many of the world’s most vital financial and commodity markets, robust and consistent volatility benchmarks are not readily available. Until now.
Derived from the world’s most actively traded options on futures contracts across major asset classes, the CME Group Volatility Index (CVOL) delivers the first ever cross-asset class family of implied volatility indexes based on simple variance. Using our proprietary simple variance methodology that assigns equal weighting to strikes across the entire implied volatility curve, the CVOL Index produces a more representative measure of the market’s expectation of 30-day forward risk.
Multi-asset class coverage
Derived from liquid options on futures markets
IOSCO compliant
User-friendly calculation
CVOL’s simple variance approach offers several user-friendly advantages:
- Creates a consistent and tractable metric across different products and asset classes
- Delivers the ability to easily replicate an equivalent simple variance options portfolio via equal weighted option strips
- Ensures more accurate implied volatility estimation of “right-tailed” products that can accelerate in either direction (FX, Rates, Corn, Natural Gas, etc).
- Enables easy translation to Bachelier-type risk quotations "(e.g., 73 norms)"
- Works with negative asset prices
- Produces auxiliary indicators (DnVar, UpVar, Skew, Convexity, ATM) that enable more comprehensive sentiment analysis
Available today in the form of historical reference indexes (daily, close-to-close basis, using settlement prices) on five asset classes across financial and commodity markets, the CME Group Volatility Index (CVOL) methodology will be rolled out to additional key benchmarks in H1 2021. CME Group will then move to publishing real-time index calculations.
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The CVOL methodology will be rolled out in phases to key benchmarks across CME Group's asset classes, and eventually offered as real-time indexes.
CVOL Indexes measure the expected risk or volatility of an underlying futures contract based on the information contained in the prices of options on that underlying futures contract. CVOL Indexes are generated using simple, or Gaussian, variance, as the base to provide a consistent and tractable metric that can be compared across different individual products for a given asset class, and additionally within and across asset classes themselves.
CVOL Indexes use the option prices from two tenors (expirations) of options in order to generate a time weighted average that centers on 30 days. Each of the two tenors has its own variance metric which uses the actual option prices to estimate the area under the curve of expected market outcomes for that tenor. Each option price is multiplied by the average distance to the two adjacent strikes to create an area under the outcome curve. The lower the option price (with the same width to the nearest strikes), the less probability of the underlying futures contract’s price ending up in that price range if the slice or section’s area is divided by the sum of all the areas across the range of possible outcomes. The sum of these areas is therefore meant to represent the expected variance of the underlying futures contract’s price.
By annualizing and taking the square root of the variance measurement, a standard, normal volatility number, as generally understood in the marketplace parlance, is produced.
By time-weighting the variances to a target of 30 days (prior to taking the square root) a 30-day expected variance is generated. That 30-day variance is then annualized and square-rooted to produce a 30-day forward-looking volatility estimate for the underlying futures.
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CME Group Benchmark Administration Limited (CBA) is the benchmark administrator of the CME Group Volatility Index (CVOL) family of benchmarks, with Chicago Mercantile Exchange Group Inc. providing Calculation Agent and distribution services. Bantix Technologies, LLC, will provide calculation services on behalf of CME Group Inc.
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