VolContract Futures, VolX Indices, VolX Stats,
VolX Cones, and Research

VolX disseminates, on a daily basis, Listed VolContract futures, the VolX Indices, the VolX Stats, and the VolX Cones data via its own web site and through various quotation vendors.

VolContract Futures

The VolContract futures Data pages catalog both historical and current data, including settlement prices, volume, open interest, and intraday prices, for all listed VolContract futures on all underlying assets.  Currently, VolContract futures are trading on the CME Euro FX Futures (6E).

In the future, as other contracts are added, there will be a new page dedicated to each underlying asset on which VolContract futures will trade.

VolX Indices

Warning: VolX indices should be used as a guide only. VolX indices will not be used to settle VolX products (VolContract futures, VolShare securities, VolOption contracts, or VolSwap instruments).  These instruments will settle to the inter-day realized volatility, using the VolX formula, over a defined period of time (typically from options expiration to options expiration). This time period (called the Realized Volatility Period) may not coincide exactly with the rolling 1-month (21-trading-day), 3-month (63-trading-day), or 12-month (252-trading-day) time frames of the VolX indices.

A brochure in PDF format is available at VolX Indices and VolX Stats.

RealVol (RVOL)

The flagship index of the group is RealVol: The VolX Index of Historical Realized Vol. There are three backward-looking time frames: one month, or 21 trading days — 1RVOL; three months, or 63 trading days — 3RVOL; and 12 months, 252 trading days, or one year, of data — 12RVOL.

These reference indices are updated once daily, after the close, and thus provide continual moving averages of the historical realized volatility of the underlying asset over the three designated time frames.

RealVol of Vol (RVOV)

Of course, volatility itself, like any other asset, displays a volatility of its own value or price. The VolX Index of RealVol of Vol, or RVOV, is designed to measure this volatility of volatility, once again, over three backward-looking time frames: one month, or 21 trading days — 1RVOV; three months, or 63 trading days — 3RVOV; and 12 months, 252 days, or one year, of data — 12RVOV.

As was the case for their RVOL counterparts, these RVOV reference indices are updated once daily, after the close, and thus are continual moving averages of the historical realized volatility of volatility of the underlying asset over the three designated time frames.

Our web site provides a wealth of volatility-related information. Among the many informative pages in the VolX indices section are The VolX Indices and the Historical Realized Volatility Charts. The user has access to a substantial database for a variety of asset classes, with historical information that, in some cases, goes back as far as 30 years.

FVOL

We also provide the VolX indices of Forecast Realized Volatility, or FVOLs, as well. While the previous two indices were backward-looking, this third VolX Index, FVOL, looks to the future. Our Index of Forecast Vol is calculated by the Volatility Institute of the NYU Stern School of Business, which is headed by Nobel laureate Robert Engle. Using a modification of professor Engle's pioneering GARCH volatility-forecasting methodologies, The Volatility Institute disseminates three indices that attempt to forecast realized volatility for the three time frames upon which the VolX Historical Indices are based.

VolX Stats

A brochure in PDF format is available at VolX Indices and VolX Stats.

PVOL

Once the Realized-Volatility Period for VolContract futures begins, VolX disseminates daily updated values, as calculated by the VolX formula, of the to-date Realized Volatility of the underlying instrument on which the particular VolContract futures is based. These PVOLs, or Partial Volatility Series, thus provide a daily reference for traders of VolContract futures.

IVOL

Throughout the life of any option, one can calculate the implied volatility of the option's premium. Similarly, VolContract futures have an implied-like pricing component of their own. By using the market or settlement price of VolContract futures along with the PVOL and a root-mean-square formula, one can infer the traders' collective volatility forecast embedded in the VolContract futures' price. (See the separate discussion of Inferred Volatility, or IVOL, under VolContract futures.)

GVOL

Finally, in similar fashion to the FVOL series' forecasts of one-month, three-month, and one-year realized volatility, the Volatility Institute will provide GARCH Vols, or GVOLs, which forecast, using the modified GARCH methodology, expiration values for existing VolContract futures over all time frames offered.

Traders thus have yet another customized tool to help them in their assessment of future realized volatility, as they trade VolContract futures.

The VolX Methodology for Calculating VolX Indices and VolX Stats
When Underlying Futures Contracts Roll Over

In the calculation of all VolX indices (RVOL, RVOV, and FVOL) or 12Vol series (PVOL, IVOL, or GVOL) values, if futures contracts are the underlying asset from which these values are derived*, there comes a point where the front-month futures contracts, whose daily settlements are used to form the log-returns that are furnished to the VolX formula, expire.  And, it is logical to assume that the previously deferred month, which now becomes the new front month, then becomes the contract upon which further returns are based.

The process, however, is not without a potential complication, which needs to be explained.  Futures contracts are, as their name implies, a prediction — a forecast of a future event.  As such, their values are predicated upon many factors, and so it is natural to assume that when one futures contract expires, the next one, chronologically, which may not expire until one month, or perhaps three months, later, may differ in price from the recently expired one.  Clearly, when one endeavors to calculate the Realized Volatility of the underlying asset, such a “jump” in successive daily closing prices could be problematic.  Why?  Consider the following.

Suppose that a March futures contract on some underlying has just expired at a price of 100.  Suppose, further, that, at that very moment of expiration, the deferred June contract is trading at 102.  Finally, suppose that, in the next day’s trading, the June futures remain unchanged and close once again at 102.  In the calculation of a continuing series of closing-settlement returns, one might use the March contract until it stops trading.  In this case, the final price is 100.  For the next trading day, there is zero inter-day volatility, because the market is unchanged, and yet the new closing reference point would be 102 — that of the June contract.  In the calculation process, were one to simply “roll” from March into June, there would be the appearance of a two-point jump in the reference prices, from 100 to 102, implying an inter-day Realized Volatility when, in fact, there is none.

To address this potential problem, The Volatility Exchange resorts to a rollover process, whereby, on the day following the expiration of a futures contract, the previous day’s settlement price of the next contract (now the front month) is used to calculate the next return of VolX indices and 12Vol series for the underlying, if futures are the underlying.  For example, in the above scenario, let us attempt to calculate a VolX 3RVOL (an Index of Three-Month Historical Realized Volatility) return, upon expiration of the March futures contract.  To ensure continuity of pricing, without the possibility of a “false jump,” one would immediately resort to referencing the settlement price of the June contract, on the expiration day of the March contract, and one would use that price as the first of two that would form the first June return, thereby avoiding any possibility of a gap or jump in price, when the March contracts roll over to June.

VolX will apply this procedure for the calculation of all of VolX indices and VolX 12Vol series that use futures as the underlying, thereby providing accurate assessments of the underlying assets’ volatilities, without the potential of any artificial “price movement” caused uniquely from the futures rollover process.

*Note:  Not all VolX indices use futures contracts as the underlying asset; some indices may be based upon a spot, cash, or index as the underlying.

VolX Cones

Volatility cones provide a way to look at RealVol index information on the ranges of Realized Volatility for different time periods over various "look back" windows.  Seven colored lines are provided.  For each time period, a maximum, minimum, median, and percentiles of 90%, 70%, 30%, and 10% are furnished.  Each value should be interpreted as:  x% of the time, volatility for this time period (horizontal axis) and for this look-back period (chosen from the menu above) was less than or equal to the value displayed in the aqua header.

For a complete discussion and explanation of this topic, please see Volatility Cones Come In
New Flavors, provided courtesy of Option Pit.

Research

This simple simulation is intended to show one use of VolContract futures as a hedge for the volatility exposure of an options book.  The example assumes that the options position is established at the start of the Realized-Volatility Period (RVP) for the quarter selected and is held to expiration.  It is also assumed that the follow-up hedges take place at the daily settlement price of the futures contract and the daily theoretical value of VolContract futures with no commissions or slippage.  The intention of this simulation is not to provide participants with software to enable them to hedge their specific options book, but rather to show the risk-reduction potential of utilizing VolContract futures for this purpose.

For a complete discussion and explanation of this topic, please see Volatility Hedging — Turn Up the Static!

Summary

To summarize: VolX disseminates, on a daily basis, settlement and intraday prices of currently listed VolContract futures, as well as volume and open interest information.  Nine VolX Indices based on the underlying asset (three each of RVOL, RVOV, and FVOL) and several VolX Stats based on a particular VolContract (PVOL, IVOL, and GVOL) are also furnished.

Another way to consider these six measures is that three are backward-looking (RVOL, RVOV, and PVOL), while three more are forward-looking (FVOL, IVOL, and GVOL). All are designed to be informative reference gauges that measure various aspects of realized volatility both retrospectively and prospectively.

VolX cones provide another way to look at RealVol information on the range of Realized Volatility over different time periods and for various "look back" windows.

Our Portfolio Hedging Simulation highlights the considerable hedging capabilities of VolContract futures overlays on an options portfolio.

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