Market sentiment can be challenging to quantify, but financial analysts and traders have a powerful tool to help them gauge it: CME Group’s Volatility Index, or CVOL. This index is particularly useful for navigating market uncertainty, especially through its convexity metric.
What is CVOL Convexity?
CVOL convexity is the ratio of CVOL (implied 30-day forward volatility) divided by the market’s at-the-money implied volatility. It measures the excess variance in the out-of-the-money options strike prices relative to the at-the-money options. This metric is useful for assessing the market's level of uncertainty and its expectations for future price movements.
Higher convexity indicates greater price volatility for out-of-the-money options relative to the current market price. This suggests increased market uncertainty about future price movements, with the expectation that the underlying futures price will deviate from its current level. Essentially, higher convexity reflects a growing sense of future uncertainty in the options market, beyond what is indicated by volatility alone.
Examples of Convexity in Action
1. U.S. Treasury Futures
Daily convexity across the yield curve from 2013 to 2022 highlights two key points: Convexity tends to be more sensitive in the shorter end of the yield curve, thus greater variance as yields may be moving higher or lower.
In 2013, it was the “taper tantrum” when the Fed was reducing their quantitative easing, causing Treasury markets to move. In 2020 and 2021 due to COVID-19, supply chain shocks and higher inflation saw increased convexity.
As of early 2025, convexity fluctuated around its historical average of 1.06. However, in April, changes in U.S. trade policies caused convexity and Treasury yields to spike. Since then, convexity has remained high, suggesting greater uncertainty in future Treasury yields. While 30-year convexity remains stable, two-year convexity is increasing, aligning with historical patterns.
2. British Pound Futures
On June 23, 2016, the UK voted to leave the EU. Leading up to the referendum, the British Pound was relatively steady around 1.43. However, convexity declined to a low of 0.96, indicating the market was focused on at-the-money strike prices. On the day of the vote, convexity spiked, showing increased uncertainty and more activity in out-of-the-money options.
3. Euro Futures
Similarly, the convexity of Euro futures has been cycling around 1.05, its long-term mean and median since October 2013. In August 2024, convexity increased as the options market was uncertain about the Euro’s direction. As the Euro futures bottomed in January 2025, convexity initially spiked but has since reverted to the mean, suggesting the market perceives less uncertainty in the foreseeable future.
The next time you see CVOL convexity increase, consider what it might imply about market sentiment.
OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.
All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).
