What is the Nasdaq-100 Volatility Index?

The popularity of volatility indices like Nasdaq 100 Volatility Index is growing as investors look for instruments to hedge against unexpected losses. 

What is the Nasdaq-100 Volatility index and how is it used for hedging and profiting from market volatility? Let us find out below.

Key points

What is Nasdaq 100 Volatility Index?

The definition of the Nasdaq 100 Volatility index refers to an index that measures the 30-day implied volatility, as expressed by options contracts, on the Nasdaq 100 (US Tech 100).

In order to understand what Nasdaq 100 Volatility Index means we need to first look at volatility indices and the underlying Nasdaq 100 index.

A volatility index is an index that measures near-term market expectations and investor sentiment by taking into account price movements of options with near-term expiration dates. These indices measure the volatility of an underlying index.

Here, the Nasdaq 100 Volatility Index measures the market sentiment for the underlying Nasdaq 100 index by taking into account the prices of Nasdaq-100 index options.

Nasdaq 100  is one of the most followed benchmark indices in the world. This index tracks the performance of the top 100 non-financial companies listed on the Nasdaq Stock Exchange. It is known to be a benchmark index for US-listed technology stocks.

Nasdaq 100 Volatility index is also known by its ticker VOLQ. Other popular volatility indices include the CBOE Volatility index (VIX), which measures the near-term market expectations of the S&P 500 index (US500).

Nasdaq 100 Volatility Index explained: Expected future volatility

The Nasdaq 100 Volatility index seeks to measure the magnitude of price movements of the Nasdaq 100 index. Wider price swings in the underlying index will result in higher levels on the volatility index.

How is it measured? According to financial derivatives exchange CME Group, the Nasdaq 100 Volatility index is calculated based on the values of 32 Nasdaq-100 Index options.

Option contracts are considered indicators of market expectations. Traders buy long call options if they are bullish about the near-term price of the asset, while put options are considered when traders expect the price of the underlying asset to drop. Nasdaq explained the methodology:

As the Nasdaq 100 Volatility index tracks options of the underlying index, it is a forward-looking index which aims to reflect expected future volatility of the Nasdaq-100 Index for a 30-day period.

In simple words, the Nasdaq 100 Volatility index will always look at the volatility of the Nasdaq 100 index 30 days into the future from the current day.

Meanwhile, Nasdaq 100 Volatility futures contracts come with a $100 contract multiplier which means that if the Nasdaq 100 Volatility index futures is trading at $15, the value of one futures contract will be equal to $1500. VOLQ futures are listed on a monthly basis and expire at the third Wednesday of the contract month

Uses of Nasdaq 100 Volatility Index: Hedging 

Volatility indices are used as barometers for market uncertainty. These indices provide market participants with a measure of 30-day expected volatility of the underlying index tracked. 

“For example, if VOLQ is at a price level of 17.90, dividing by the square root of 12 (reflecting the number of 30-day periods in one year) implies an NDX trading range unlikely (with 68% certainty) to rise or fall more than 5.17% over the next 30-day period,” said Nasdaq.

Hedging

Traders and investors can use Nasdaq 100 Volatility index futures and options to hedge against market declines since the Nasdaq 100 Volatility index has a strong inverse relationship with its underlying Nasdaq 100 index. According to CME Group’s overview: 

Arbitrage strategies

Volatility indices are also used to capitalise on differences between expected volatility and realised volatility and other volatility arbitrage strategies.

“Over long periods, index options have tended to price in slightly more uncertainty than the market ultimately realises,” said US-based options exchange CBOE.

Earnings volatility

Additionally, Nasdaq 100 Volatility index futures provide traders with opportunity to speculate on their volatility outlook, especially ahead of expected events such as earnings.

Final thoughts 

Note that all trading contains risk. You should always perform your own due diligence if you decide to trade Nasdaq 100 Volatility. Look at the latest market news, technical and fundamental analysis, and a wide range of analyst commentary. 

Remember, past performance is not a guarantee of future returns. Your trading decisions should be based on your risk tolerance, experience in the markets and overall trading strategy. Never trade money you cannot afford to lose. 

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