Key Takeaways with Craig
Due to travel schedules, we will use the Key Takeaways section to feature a CME Group volatility index called CVOL rather than a market recap today. A couple of months ago, we wrote about this proprietary index but we thought it was a salient time to revisit it because we now provide real-time index calculation rather than just end of day measures.
As we just mentioned, CVOL index 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 again 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 level in the Euro FX and British Pound 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 in all of the featured currencies 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
Finally, the newest (and significant) feature of the CVOL tool is the real-time, streaming of the index value on CME’s website. As you can see in the bottom image below, we’ve graphed the last two days of CVOL values for the Euro FX on a minute by minute basis. This allows individuals to monitor changes in volatility in real time as the price of the underlying future moves. Formerly, CME was only publishing the CVOL value at the end of each day. In this case, you can see the volatility in the Euro FX jump as the price of the underlying fell below parity with the US Dollar and reached multi-decade low levels yesterday.
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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