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Nasdaq-100 Volatility Index: VOLQ – VOLQ and Expected Trading Ranges

The Nasdaq-100 Volatility Index, ticker VOLQ, is a measure of expected volatility of the Nasdaq-100 index (NDX) over the next thirty days as implied by options on the Nasdaq-100. But how can investors and traders interpret VOLQ to better understand that expected volatility?

If VOLQ is at 20.00, the NDX option market is implying that annualized volatility over the next 30 days will be 20.00%. That corresponds to a move up or down of 5.77% over the next 30 days (20% divided by the square root of 12 which is the number of 30 days periods in a year). The statistical confidence of this range is 68%.

If the Nasdaq-100 index is at 10,000 then the market is implying that it will be between 9,423 and 10,577 thirty days from now with 68% likelihood.

Investors and traders can use this expected range to inform trading decisions, particularly the selection of strike prices for option trades.

For example, if a hedger is worried about an outsized drop in prices, one that is greater than implied by VOLQ, they might decide to buy NDX put options as insurance. But rather than buying put options with an exercise price of 10,000 – these are likely to be the most expensive options listed in terms of time value – our hedger may choose to buy put options with a strike price of 9,400. Those put options will be much cheaper and will protect against an outsized drop in prices, one that extends beyond the likely range implied by VOLQ.

A covered call seller might use the range implied by VOLQ similarly. If they are long the Nasdaq-100 index and would like to generate additional yield by selling a covered call but want to reduce the likelihood that NDX will rally through their call strike price, they might sell a 30-day call option with a strike price of 10,600. They will collect option premium from selling the covered call and VOLQ is implying that the likelihood of NDX rallying through their strike price is less than 16% (VOLQ is implying that the likelihood that NDX will be between 9423 and 10577 is 68%, that means it is implying that the likelihood NDX is above 10577 is 16% while it is implying the likelihood of NDX being below 9423 is also 16%).

The historical values of VOLQ can inform a wide range of NDX option trades and can be used by hedgers to determine whether options are relatively inexpensive and buying options is the best way to hedge. Conversely, VOLQ may be historically high meaning that selling options, such as selling covered calls, may be the best way to hedge an existing position.

Since VOLQ uses only at-the-money options it is the most intuitive measure of implied volatility and can help investors and traders of all types achieve superior returns.

VOLQ peaked chart

For more information on VOLQ, visit our site Nasdaq.com/VOLQ.

Nasdaq® is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

© 2020. Nasdaq, Inc. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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