Key Takeaways with Craig
We are going to use today’s Key Takeaways column to re-introduce a proprietary volatility index that CME has developed called CVOL. Regular readers of our column know that we often use the at-the-money or 25-Delta strikes to represent implied volatility (“vol”) in CME options products. While both of those are indicative and widely watched measures of vol, CVOL presents a new look at vol that incorporates the entire volatility curve and utilizes a simple variance methodology to produce a consistent, representative measure of volatility across 5 major CME asset classes. Because we believe these proprietary indexes are very indicative of volatility levels, we will begin to use it more often in our Key Takeaways section, except in the Equity Index options for which we are not currently publishing CVOL.
Another nice element of the CVOL indexes is that they also provide a measure of skew in terms of Call volatility versus Put volatility. Again, as regular readers of this column know, we often use the 25 Delta Risk Reversal (Call vol minus Put vol of the strikes trading at a 25 Delta) to measure skewness in CME’s options. Using CVOL, we will continue to report on skew but using the same, representative methodology.
- The top image below is an excerpt from the dashboard CVOL view on CME’s website and you can see we’ve selected the FX markets with 6 months of history
- The CVOL column shows the current, overall CVOL level
- The CHG column shows the daily change and the Trend column shows the last five days
- The HI-LO column shows how the current level compares to the last, in this case, six months. As you can see, and as we’ve written about, CME’s FX options markets are trading at particularly high vol levels relative to the last six months.
- The DNVAR, SKEW and UPVAR columns are all measures of the skewness. As you can see, the Aussie Dollar, Euro FX, Pound, Canadian Dollar and Mexican Peso are all skewed toward the Puts.
Finally, one of the most valuable elements of CVOL is the ability to look at the historical volatility levels in all of these different products. The lower image is an excerpt from CVOL on CME’s website to which a user can navigate simply by clicking the graph image on the dashboard view. In this case, we’ve chosen the Euro FX. As you can see from the solid blue line, Euro FX volatility is at the highest level we’ve seen in at least six months. We’ve also chosen to graph the skew, which you can see in the purple line; the lower (or more negative) the skew, the more relative value we see in the Puts over Calls, and vice versa.
We encourage all of our readers to learn more about these innovative indexes here.
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