Key Takeaways with Craig
Due to vacation schedules, we will be using the Key Takeaways section to showcase CME Group tools and products over the next couple of days rather than providing a daily market recap. The first product we will feature is our CVOL index which is a proprietary volatility index on many of CME’s major products and asset classes. The CVOL indexes use a simple variance methodology that assigns equal weighting to strikes across the entire implied volatility curve which provides a representative measure of the market’s expectation of 30-day forward risk. Regular readers of In FOCUS will know that we often look at 25-delta or At The Money (ATM) strikes as a measure of volatility in CME options markets and these are certainly representative of volatility levels, but the using the entire volatility curve provides another representative view on skew and volatility in different products.
We’ve chosen CME FX markets to showcase the CVOL tool but these indexes are available in CME’s short and long term Interest Rates markets, Metals, Energies and Agricultural markets.
The top image below shows a Dashboard view of CVOL levels in the FX markets:
- You can see in the top of the screen, we’ve used 6 months of Data but this is user-definable
- In columns 3-6 we show the current Vol level, the daily change, the change (positive or negative) of each of the last 5 days and the Hi and Lo levels over the last 6 months (again, 6 months is defined by the user)
- As you can see, and as we’ve written about recently, the current volatility levels in the Euro FX is near the highest we’ve seen over the last 6 months
- UPVAR, DOWNVAR (DNVAR) and Skew measure the relationship between the Calls and Puts, or skew, of that option. In this case, the DNVAR is greater than UPVAR, resulting in a negative skew number and indicating that the skew is towards the Puts at the time of this writing
- In addition to the dashboard view, the tool allows a user to drill down into many of the different elements to get greater context and detail
- The lower graph depicts the CVOL level of the Euro FX over the last 6 months. This adds to the utility of the tool since historical context is critical when analyzing volatility
A complete and detailed description of the methodology and each element of the tool and index is outside the scope of this column, but we would encourage all of our In FOCUS readers to learn more at www.cmegroup.com/cvol.
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