CME Group Volatility Indexes (CVOL) – FAQ

Starting November 17, CME Group will begin publishing an initial set of CME Group Implied Volatility (CVOL) Indexes and related indicators on a close-to-close basis. These new indexes and indicators will provide users with more precise measures of the expected future risk for any given market as reflected by their respective options prices.

The initial set of CVOL Index products are:

• 10-Year US Treasury
• AUD/USD
• CAD/USD
• EUR/USD
• GBP/USD
• JPY/USD
• Broad-based G5 FX Volatility Index

For each product, the following CVOL Indexes and indicators will be published:

• CVOL Index, the primary implied volatility index
• Up Variance (“UpVar”)
• Down Variance (“DnVar”)
• Skew

CVOL Indexes and indicators will initially be published once-per-day. CVOL Indexes will also be coming soon for other CME Group benchmark products.

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CVOL Indexes measure the expected risk or implied volatility of an underlying future based on the information contained in the prices of options on that underlying future.  In general, the expectation has a 30-day forward-looking horizon.  The metric is an annualized standard deviation as used in typical option pricing models.  The index family also includes metrics predicated on just out-of-the-money (OTM) calls and out-of-the-money OTM puts, ‘UpVar’ and ‘DnVar’, respectively, which are holistically consistent with the metric generated by using both the calls and the puts together.  These related indexes provide insight into the direction that the collective marketplace is expecting greater risk.  

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CVOL Indexes use the option prices from one or two tenors (expirations) of options in order to generate a time-weighted average that centers on 30 days.

Each of the two tenors has its own variance metric which uses the actual option prices to estimate the area under the curve of expected market outcomes for that tenor. Each option price is multiplied by the average distance to the two adjacent strikes to create an area under the outcome curve. The lower the option price (with the same width to the nearest strikes), the less probability of the underlying futures contract’s price ending up in that price range if the slice or section’s area is divided by the sum of all the areas across the range of possible outcomes. The sum of all of these areas is therefore meant to represent the expected variance of the underlying futures contract’s price. By annualizing and taking the square root of the variance measurement, a standard, normal volatility number, as generally understood in the marketplace parlance, is produced.

By time-weighting the variances to a target of 30 days (prior to taking the square root) a 30-day expected variance is generated.  That 30-day variance is then annualized and square-rooted to produce a 30-day forward-looking volatility estimate for the underlying future.  

An Introduction to CVOL

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Simple variance, also known as Gaussian variance, is the square of the standard deviation of a normally distributed population.  Simple variance allows for the underlying asset or futures prices to be negative, such as interest rates, or even commodities, such as oil. 

This characteristic of simple variance distinguishes itself from log variance.  Log variance, or the assumption that the underlying asset or future will exhibit a log normal distribution, does not allow for prices below zero. In fact, log variance swaps, which have been the most commonly employed variance swaps in the marketplace for several decades, will have an infinite value if an asset actual priced at zero. Other volatility indexes that use all the option prices from a specific tenor often attempt to build a replicating portfolio of that potentially infinite payoff.  This renders those vog variance metrics as being not very “simple.”

CVOL Indexes are generated using simple, or Gaussian, variance as the base to provide a consistent and tractable metric that can be compared across different individual products for a given asset class, and additionally across asset classes themselves.

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In addition to the primary implied volatility, CVOL Index, there are three other accompanying indicators which will price specific properties of the underlying asset’s expected future risk, as reflected by its options prices.

The three additional indicators are: ‘UpVariance’ or ‘UpVar;’ ‘DownVariance’ or ‘DnVar;’ and Skew.

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Up Variance, or UpVar, is a metric that employs the same method for estimating the standard deviation as simple variance, but specifically uses only OTM calls in the calculation.  The variance estimate is then doubled or mirrored in order to provide an apples-to-apples analogue to the two-sided set of options used in the regular index calculation.

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Down Variance, or DnVar, like Up Variance, employs the same method for estimating the standard deviation as simple variance, but uses only OTM puts in the calculation.  Similarly, the variance estimate is then doubled or mirrored in order to provide an apples-to-apples analogue to the two-sided set of options used in the regular calculation.

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Skew compares the Up Variance and Down Variance numbers to provide insight into how much implied volatility is priced into Calls compared to Puts. Two Skew numbers are provided, one showing the difference between the two (UpVar – DnVar), such that negative values indicate that the implied volatility is collectively higher for puts than for calls. The other Skew metric is the ratio of the two calculated by dividing the UpVar by the DnVar.  In this case, if the puts had collectively higher implied volatility, the resulting measurement would be less than 1.0.

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Initially, the CVOL Indexes on the 10-Year Treasury Note futures and five major currency pairs will be published. The methodology has been found to work across other option complexes at CME Group, and so it is our intention to have a suite or family of indices that uses a completely consistent methodology across all CME, CBOT, NYMEX and COMEX products that have robust options markets. CVOL Indexes and indicators on our additional benchmark products are coming soon and will be published over the next several months.

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Each official daily index fixing and each indicator fixing will be published same-day, after preliminary settlement prices and files have been published.

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CME Group will begin publishing CVOL Indexes on a daily, close-to-close basis, using settlement prices. These initial publications will also provide two years of historical EOD implied volatility numbers for each index and indicator series on each product being published. 

CME Group will begin publishing real-time index calculations in H2 2021.

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CVOL is a family of benchmarks based on industry best practices, complying with the IOSCO Principles for Financial Benchmarks (July 2013), including but not limited to implementing a governance structure and creating a transparent methodology. The methodology and benchmark statements will be made publicly available.

Benchmark Statement
Methodology

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CVOL Indexes are administered by CME Group Benchmark Administration Limited (CBA). In line with the IOSCO Principles for Financial Benchmarks, CBA has appointed an Oversight Committee, to review the integrity of the benchmark and challenge the administrator in all aspects of the benchmark determination process. CVOL Indexes will be subject to a regular audit process

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We have several resources you can access to learn more about the CVOL Indexes, all of which are available on the CVOL Index homepage.

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The latest index values and indicators are displayed on our CVOL Index Visualizer tool, provided by QuikStrike, on our website.

Registered users can also download at least two years of history for each index through CME DataMine.

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The full description for the CVOL Index methodology is available here.

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CME will offer a variety of direct licensing options including redistribution, historical usage, derived usage, and other common customer data licensing needs.  Please contact CME Data Sales to discuss your specific licensing needs.

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CME Group is working with redistributors to make this data available in their platforms and other data services. Ultimately, many third parties prioritize new data products based upon their direct customer demand. Please contact your redistributor to request this data as part of your data services. 

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