Volatility Monitor1st Quarter2013APRIL 2, 2013John W. LabuszewskiManaging DirectorResearch & Product Development312-466-74...
Volatility is one of several key inputs into                    Implied Volatilitymathematical option on futures pricing m...
study those average levels                                                     in        the          hopes             of...
E.g., a hypothetical at-the-money call exercisable for                                                                up a...
30-Day Historical Volatilities over 1-Year Window                                                     (1/3/12 to 12/31/12)...
30-Day Historical Volatilities over 3-Year Window                                                          (1/2/10 to 12/3...
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Volatility Monitor Update Q1 2013

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Each quarter, CME Group Research analyzes price volatility for the previous three months across key asset classes and presents it in the Volatility Monitor Update. The purpose of the update is to provide a solid understanding of volatility as one of the prime drivers of options premiums.

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Volatility Monitor Update Q1 2013

  1. 1. Volatility Monitor1st Quarter2013APRIL 2, 2013John W. LabuszewskiManaging DirectorResearch & Product Development312-466-7469jlab@cmegroup.com
  2. 2. Volatility is one of several key inputs into Implied Volatilitymathematical option on futures pricing models alongwith market price, strike price, term until expiration Implied volatility (IV) may be thought of as theand short-term interest rates. While market price volatility that is implicit in the premium associatedmovements exert the most obvious impact upon the with any specific option. You can use any number ofoption premium, volatility remains a very important available mathematical option pricing models tofactor. So much so that many traders strive to derive the (theoretical) option on futures premiumpredict future levels of volatility and engage in so- as a function of the current market price (P), strikecalled “volatility plays” as a result. price (S), volatility (V), term until option expiration (t) and short-term rates (r). !"#$" = % , , , (,Traders may “buy volatility” generally by buyingoptions; or, “sell volatility” by selling options, oftenin concert with the placement of a hedge in thefutures market structured by reference to the net But there may be no need to calculate thedelta associated with the option positions. theoretical option premium when the premium may be observed in a competitively traded marketplace.This report represents an update of volatility through An implied volatility (IV) is derived by solving thethe 1st quarter 2013 in a variety of what we might option pricing formula to find volatility as a functionconsider to be CME Group “flagship” products. of market price, strike price, term and short-term rates. ) =% !"#$", , , (,Historic VolatilityThere are many ways to measure volatility in anyparticular option market. “Historic volatility” is a Unfortunately, solving a mathematical option pricingreference to the annualized standard deviation of model, such as the Black formula (1976) for optionsday-to-day price movements in the market that on futures, results in an unsolvable polynomial.underlies the option of interest. This figure is However, it is possible to utilize a computer assistedgenerally calculated over a particular prior time iterative methodology quickly to converge to aperiod, e.g., 30 days, 60 days, 90 days, etc. solution.Note that over the past month (roughly 30 calendar 30-Day HVs: Interest Rates 25% 140%days), there are generally 21 trading days; 42trading days over the past 60 calendar days, etc. 120% 20%An annualized historic volatility (HV) is generally 100% Bonds & Notescalculated using the following formula, assuming 15% Eurodollars 80%that there are 252 trading days in a calendar year. 10% 60% 1 = √252 ∙ − 40% 5% 20% 0% 0% = ln P /P Apr-10 Oct-10 Jan-11 Apr-11 Oct-11 Jan-12 Apr-12 Oct-12 Jan-13 Jul-10 Jul-11 Jul-12 Where: T-Bonds 10-Yr T-Notes Eurodollars (3rd Mth) P = Price of underlying market N = Number of business days in period, generally Mean Reversion 20 for 1 month; 40 for 2 months, etc. While volatilities may vary considerably over time in the context of any given market, they do tend to hover towards a long-term mean or characteristic level. Thus, option traders often find it useful to1 | Volatility Monitor 1st Quarter 2013 | April 2, 2013 | © CME GROUP
  3. 3. study those average levels in the hopes of Comparing HV and IVidentifying mispriced options. We might compare those levels to current implied 30-Day HVs: Currencies volatilities in actively traded options to get a feel for 40% whether options are reasonably priced relative to 35% historic averages. 30% 25% 30-Day HVs: Grains 20% 70% 15% 60% 10% 50% 5% 40% 0% 30% Oct-10 Oct-11 Oct-12 Apr-10 Jul-10 Jan-11 Apr-11 Jul-11 Jan-12 Apr-12 Jul-12 Jan-13 20% EuroFX Japanese Yen 10% British Pound Swiss Franc Australian Dollar Canadian Dollar 0% Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13One popular technique is to study the average(median) volatility observed in the marketplace over Corn Soybeans Soybean Oilthe past year or past three (3) years. The tables Soybean Meal Wheatfound at the conclusion of this document provide themedian, maximum and minimum levels of 30-day E.g., assume that a (hypothetical) call optionhistoric volatilities in a sampling of some of the most exercisable for corn futures had an implied volatilityactively traded CME Group markets including the of 25.00%. The 1-year median observation for 30-interest rate, stock index, currency, energy, grain, day HVs in nearby corn futures is at 22.05%. Thus,precious metals and livestock complexes. this option displays volatility that is somewhat higher than observed volatility over the past year, 30-Day HVs: Energy falling somewhere between the 60th and 75th 80% percentiles. 70% 60% 30-Day HVs: Precious Metals 90% 50% 80% 40% 70% 30% 60% 20% 50% 10% 40% 0% 30% Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 20% 10% Canadian Dollar WTI Crude Oil 0% Apr-10 Oct-10 Jan-11 Apr-11 Oct-11 Jan-12 Apr-12 Oct-12 Jan-13 Jul-10 Jul-11 Jul-12 Natural Gas Heating OilWe further include graphics of 30-day historicvolatilities over the past several years. Generally, Gold Silverwe examine volatility in the lead or nearby month,with the exception of Eurodollar futures where the The 3-year median observation for 30-day HVs is at3rd month historically has often represented the 28.22%. The IV of 25.00% is below the 3-yearmost actively traded contract. median falling between the 25th and 40th percentiles. Viewed by this metric, the IV might just be just below average by historic standards.2 | Volatility Monitor 1st Quarter 2013 | April 2, 2013 | © CME GROUP
  4. 4. E.g., a hypothetical at-the-money call exercisable for up and down in parallel, the 30-day HV tends to be aS&P 500 futures displayed an implied volatility of bit over-reactive relative to the VIX. I.e., traders’14.50%. This is above the 1-year median of aggregate expectations regarding volatility in the13.54% and between the 60th and 75th percentiles. S&P 500 tend to be a bit more stable than the 30-But it is below the 3-year median of 14.70%, falling day historic average.between the 40th and 50th percentiles. S&P 500 Volatility 30-Day HVs: Livestock 50% 70% 45% 60% 40% 50% 35% 30% 40% 25% 30% 20% 20% 15% 10% 10% 5% 0% 0% Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Oct-09 Jan-10 Apr-10 Oct-10 Jan-11 Apr-11 Oct-11 Jan-12 Apr-12 Oct-12 Jan-13 Jul-10 Jul-11 Jul-12 Live Cattle Lean Hogs 30-Day Historic Volatility VIX IndexImplied Volatility Index Concluding NotesTraders often reference the IV associated with at- or Finally, please be aware that volatilities associatednear-the-money calls or puts as standard reference with Eurodollar futures are calculated based on thefor where traders (implicitly) believe volatility will be implied yield of the instrument where yield = 100between the current point in time and option less the quoted price. Because yields have fallen toexpiration. As such, IVs are “forward-looking” while historical lows, the base of the volatility calculationHVs may be regarded as “backwards-looking.” becomes very low and tends to inflate the calculated volatility.But the IV for any particular option may be a bitdifferent than the IV for another option even where We do not, of course, purport to offer specificthe two options are based upon the same underlying trading advice. Rather, our purpose here is toinstrument with the same expiration date. That may provide an enhanced understanding of volatility asbe explained by the fact that traders may impute one of the prime drivers of option premiums and tomore or less value to options that are in- or out-of- illustrate a simple but popular way of regardingthe-money. volatility.The CBOE S&P 500 VIX Index is a popular measurereferencing IVs. It represents an average IVsampled over a variety of liquid CBOE S&P 500options. While the VIX and 30-day HVs typically run3 | Volatility Monitor 1st Quarter 2013 | April 2, 2013 | © CME GROUP
  5. 5. 30-Day Historical Volatilities over 1-Year Window (1/3/12 to 12/31/12) Percentiles Max 90% 75% 60% Median 40% 25% 10% MinINTEREST RATES Eurodollar 68.50% 62.03% 52.05% 49.04% 47.07% 45.97% 44.27% 38.09% 30.57% (3rd Month) T-Bonds 11.34% 10.71% 9.82% 8.83% 8.52% 8.19% 7.73% 6.92% 6.49%10-Yr T-Notes 6.48% 5.06% 4.62% 4.40% 4.22% 3.95% 3.70% 3.41% 2.79%STOCK INDEXES S&P 500 21.26% 18.24% 15.10% 13.98% 13.54% 12.63% 11.13% 10.39% 6.54% Nasdaq-100 23.61% 20.83% 17.78% 16.74% 16.01% 14.61% 13.12% 11.56% 10.47%CURRENCIES EuroFX 12.04% 10.49% 8.71% 8.23% 8.01% 7.63% 6.88% 6.54% 6.00%Japanese Yen 12.44% 11.08% 9.17% 7.93% 7.63% 7.27% 6.79% 6.03% 5.37% British Pound 9.04% 8.11% 7.42% 6.91% 6.10% 5.74% 5.25% 4.44% 3.75% Swiss Franc 12.12% 10.62% 8.61% 7.82% 7.16% 6.89% 6.68% 6.32% 5.75% Australian $ 13.06% 11.61% 10.66% 9.62% 8.88% 7.98% 7.10% 6.54% 6.05% Canadian $ 9.37% 8.51% 7.17% 6.46% 6.01% 5.64% 5.19% 4.54% 3.43%ENERGYWTI Crude Oil 43.66% 41.16% 27.53% 23.85% 21.86% 20.47% 17.06% 14.88% 11.59% Natural Gas 65.76% 61.76% 50.69% 47.75% 42.71% 39.72% 37.19% 32.83% 27.02% Heating Oil 29.00% 25.97% 22.65% 18.95% 17.78% 16.80% 15.79% 14.45% 12.13% RBOB Gas 68.48% 64.74% 32.90% 27.91% 24.87% 23.28% 18.75% 16.41% 13.46%GRAINS Corn 45.89% 42.43% 29.06% 24.48% 22.05% 19.70% 17.06% 15.56% 13.11% Soybeans 35.21% 30.82% 25.50% 22.79% 21.00% 20.07% 18.62% 17.73% 15.97% Soybean Oil 27.61% 24.46% 21.88% 20.33% 19.13% 18.64% 17.64% 15.97% 13.57%Soybean Meal 38.87% 34.27% 27.84% 26.07% 24.84% 24.10% 23.15% 20.97% 17.50% Wheat 44.87% 40.41% 34.59% 31.53% 30.61% 25.55% 21.53% 19.05% 16.72%PRECIOUS METALS Gold 23.98% 21.34% 18.03% 13.82% 13.18% 12.94% 12.58% 11.84% 10.30% Silver 46.34% 36.79% 31.05% 29.34% 27.32% 25.32% 24.21% 21.36% 16.77%LIVESTOCK Live Cattle 23.60% 17.57% 16.43% 14.60% 13.48% 13.06% 12.56% 10.84% 7.16% Lean Hogs 64.84% 60.41% 21.29% 18.61% 17.81% 16.88% 15.62% 14.47% 11.64%4 | Volatility Monitor 1st Quarter 2013 | April 2, 2013 | © CME GROUP
  6. 6. 30-Day Historical Volatilities over 3-Year Window (1/2/10 to 12/31/12) Percentiles Max 90% 75% 60% Median 40% 25% 10% Min INTEREST RATES Eurodollar 126.18% 93.26% 79.81% 68.50% 62.81% 57.06% 49.82% 44.57% 30.57% (3rd Month) T-Bonds 19.32% 15.80% 12.49% 10.91% 10.23% 9.78% 8.66% 7.40% 5.98% 10-Yr T-Notes 9.86% 7.95% 6.93% 6.25% 5.46% 5.02% 4.44% 3.70% 2.79% STOCK INDEXES S&P 500 44.46% 30.13% 20.39% 15.86% 14.70% 13.50% 11.21% 9.67% 6.01% Nasdaq-100 43.50% 29.30% 21.45% 17.87% 16.72% 15.58% 12.97% 10.69% 7.03% CURRENCIES EuroFX 16.51% 13.45% 12.04% 10.88% 10.36% 9.38% 8.45% 7.08% 6.00% Japanese Yen 21.88% 12.04% 10.27% 9.16% 8.55% 7.77% 7.11% 6.20% 3.98% British Pound 14.43% 10.48% 9.39% 8.63% 8.35% 7.97% 7.18% 5.43% 3.75% Swiss Franc 38.62% 14.72% 11.39% 10.55% 10.23% 9.55% 8.38% 6.72% 5.75% Australian $ 25.69% 19.55% 14.39% 12.27% 11.32% 10.80% 9.40% 7.41% 6.05% Canadian $ 18.78% 13.50% 10.45% 9.06% 7.71% 7.09% 6.33% 5.33% 3.43% ENERGY WTI Crude Oil 55.63% 42.71% 35.65% 28.99% 27.14% 25.74% 21.93% 18.20% 11.59% Natural Gas 69.44% 62.01% 48.49% 43.41% 40.94% 38.62% 35.98% 31.62% 24.05% Heating Oil 40.00% 31.94% 28.20% 25.59% 23.29% 22.05% 18.82% 15.82% 12.13% RBOB Gas 68.48% 40.37% 35.01% 31.95% 28.82% 27.06% 23.51% 18.60% 13.46% GRAINS Corn 54.69% 43.35% 38.56% 30.54% 28.22% 26.67% 23.40% 17.22% 13.11% Soybeans 36.75% 30.75% 25.14% 21.66% 20.34% 19.32% 17.54% 15.33% 9.28% Soybean Oil 34.47% 25.70% 22.62% 20.31% 18.92% 18.28% 17.02% 14.87% 10.90% Soybean Meal 41.41% 34.13% 27.41% 25.87% 24.52% 23.65% 22.10% 19.09% 15.63% Wheat 60.15% 48.91% 42.02% 38.00% 34.25% 31.61% 27.88% 21.56% 16.72% PRECIOUS METALS Gold 39.76% 23.59% 19.61% 16.45% 14.98% 13.89% 12.92% 11.66% 7.37% Silver 81.12% 49.73% 42.76% 35.23% 32.09% 29.09% 25.35% 22.38% 14.84% LIVESTOCK Live Cattle 23.60% 19.47% 17.10% 14.94% 14.12% 13.46% 12.42% 10.95% 7.16% Lean Hogs 64.84% 38.84% 30.00% 22.26% 20.65% 18.87% 17.00% 15.19% 11.64%Copyright 2013 CME Group All Rights Reserved. Futures trading is not suitable for all investors, and involves the risk of loss. Futuresare a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than theamount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affectingtheir lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on everytrade. All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be consideredinvestment advice or the results of actual market experience.”Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within themeaning of section 1(a)18 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of acontract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, tradersshould only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted toany one trade because they cannot expect to profit on every trade.CME Group is a trademark of CME Group Inc. The Globe logo, E-mini, Globex, CME and Chicago Mercantile Exchange are trademarks ofChicago Mercantile Exchange Inc. Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is atrademark of the New York Mercantile Exchange, Inc.The information within this document has been compiled by CME Group for general purposes only and has not taken into account thespecific situations of any recipients of the information. CME Group assumes no responsibility for any errors or omissions. Additionally, allexamples contained herein are hypothetical situations, used for explanation purposes only, and should not be considered investment adviceor the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are supersededby official CME, NYMEX and CBOT rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action.5 | Volatility Monitor 1st Quarter 2013 | April 2, 2013 | © CME GROUP

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