It seems like almost every volatility conversation revolves around $VIX. $VIX is a real time annualized estimate of the volatility or percentage price movement of the S&P 500 over the next 30 days. But $VIX may not be a relevant measure of risk or volatility if you’re analyzing potential trades or investments in other equity indexes, bonds, metals, foreign exchange, energies or agriculturals. It’s extremely time consuming to analyze the relevant option chains to develop and track the volatilities of various product or instruments. Is there another approach? Yes! Both the CBOE and the CME calculate volatility indices for a diverse set of products. Let’s review some of the indices available, how they’re calculated and how they can be used.
What are the CBOE Volatility Indices
The CBOE is the easiest to use. The CBOE publishes volatility indices for a variety of products and the indices are available in real time on many trading platforms. The volatility measures are estimates of the 30-day expected volatility of the options of a designated underlying instrument. Some of the most relevant indices are:
The benefit of monitoring these volatility measures rather than just $VIX can be seen in the chart below comparing $OVX (oil volatility) to $VIX, using Masters In Trading Futures EDGE charting platform:
Notice some of the recent divergences between $OVX and $VIX, circled in white. Although the $OVX and $VIX can move together, $VIX is clearly not a reliable indicator of oil volatility. Using the Masters in Trading Edge Charting Platform, we can compare $OVX relative to $/CL, oil futures:
It is clear to see the “rubber band” opportunities so often discussed in Masters In Trading when $OVX and $/CL diverge or move apart and then move back together or when $OVX spikes in one direction or the other. In other words, big moves in volatility can signal big moves in the underlying.
What are the CME Volatility Indices
The CME introduced Group Volatility Index Products (CVOL) a few years ago. CME has a broader range of indices (but interestingly, no equity products), uses a more complex, comprehensive calculation methodology and publishes a broader range of related analytics. However, only daily data is currently available (just expanded to 8 years of daily data) and not available on trading platforms so it will take some effort (although the data is free) to analyze the volatilities over time. Tables with the daily indices and related analytics are available on the CME website. The CME calculates the volatility for each product based on the 30-day implied volatility of a range of out of the money puts and calls on the appropriate futures contracts. In addition to the volatility measurement, CME publishes other metrics including:
- UpVar – the upside volatility based only on call options
- DnVar – the downside volatility based only on put options
- ATM – the volatility of the at the money strike options
- Skew – the difference between the UpVar and the DnVar and the ratio of the two variances; these 2 measures can indicate an upside or downside bias in the underlying price-based options pricing
- Hi – LO gauge – shows the current volatility relative to the range of the time period selected
The CME includes an extensive list of underlying products:
- Treasury Yields – 2YR, 5YR, 10YR, 30YR
- Treasury Prices – 2YR, 5YR, 10YR, 30YR
- Shor Term Interest Rate Products – Eurodollars
- Foreign Exchange – All versus the dollar: Yen, Swiss Franc, Euro, Pound, Canadian Dollar, the Australian Dollar, and the Mexican Peso
- Metals – Copper, Gold, Silver
- Energy – Oil, Heating Oil, RBOB, Natural Gas
- Ags – Hogs, Milk, Soybeans, Soybean Oil, Soybean Meal, Cattle, Corn, Wheat
- Aggregates – single measure for each: Metals, Treasuries, Energies, FX, Commodities, Ags
Here’s a sample of the CME information for metals:
How to Talk Advantage of CBOE & CEM Volatility Measures
There’s no easy answer or standard trade set up. You must roll up your sleeves and start tracking, comparing, and analyzing the data over time using Masters In Trading’s relative value approach and tools and possibly some of your own spreadsheets. You can use the Masters In Trading Futures EDGE charting platform to track trends and relationships over time looking for divergences for potential trades. You can also monitor the volatility indices and, as you see changes such as a spike in volatility or movement in skew, use the Masters In Trading’s Wall Street Wiretapper to search for unusual option activity opportunities. For example, if you see a spike in silver volatility, you can go the Wiretapper and look for names that have exposure to silver such as silver miners.
As you dive into the analysis and start to draw your own conclusions to generate trades, paper trade your ideas to understand the dynamics before committing your hard-earned money.
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