What You Should Know About The New CME Nasdaq 100 Volatility Index Futures

By: Spencer Israel

Traders looking to hedge will have a new tool at their disposal starting Oct. 5. 

The CME and Nasdaq recently announced the launch of Nasdaq 100 Volatility Index futures (ticker: VOLQ). The product will be an alternative to the Nasdaq 100 Volatility Index futures (VXN) already offered by the Cboe. 

Why This Matters
Volatility has been the story in 2020. The sell-off in March sent volatility indexes up to levels not seen since 2008. And as Jason Zweig of the Wall Street Journal has noted, low-volatility products have drastically underperformed this year. 

In practice, volatility can be a great way to hedge a portfolio or trade. Trading volatility has been a rising trend in recent years as more instruments—such as futures, ETNs, and leveraged and inverse ETNs—have been created to offer exposure. VOLQ futures from the CME are the latest such product. 

How The VOLQ Index Works
VOLQ futures will be cash-settled based on the VOLQ Index, which measures the 30-day implied volatility of the Nasdaq 100 Index. 

The VOLQ index is different from the two main volatility indexes from the Cboe (VIX and VXN, which measure volatility in the S&P 500 and Nasdaq 100 respectively) in that it uses a different calculation. 

Implied volatility (that is, the expected move) in VOLQ is calculated using the first two in-the-money and out-of-the-money put and call strikes over the next four weeks’ worth of weekly expirations. 

Because of this, the expiration date of the futures contract is the start of the volatility window that the contract is measuring. The creators of the index say this is because traders typically only use the four strike prices closest to the ATM strike to gauge current implied volatility. 

VOLQ Futures Specs
The contract specs are similar to VIX futures. Each contract has a multiplier of $1,000 (meaning a one-point gain in the index is the equivalent of a $1,000 profit), the minimum tick is $0.05 (or $50), the block trade minimum is 50 contracts, and contracts are listed monthly.  

How You Can Use It
Options traders in particular will commonly use volatility futures to hedge their volatility risk or take advantage of implied volatility risk premium, the difference between option-implied volatility and realized volatility in the same asset over the same time period.

Traders can use VOLQ futures for a number of complex strategies, including trade changes in implied volatility of the Nasdaq 100 or express a point of view on future moves of the Nasdaq 100 and overall market. 

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