Implied Volatility (ImpVol)

Implied Volatility is the amount of volatility assumed by the market. Rather than using a simple Standard Deviation-based formula, like Historical Volatility, Implied Volatility plugs several variables, such as actual option price, underlying price, strike price, and expiration date, into the selected model and solves for volatility. Thus, this value represents the volatility implied by the other variables.

Specifically, CQG uses the volatilities implied by the Cox-Ross Rubenstein model, which calculates implied volatilities by taking weighted averages of some of the possible underlying expiration prices.

Establishing the Implied Volatility involves two major steps:

•      selecting the series to evaluate

•      performing the implied volatility calculations on those series

Calculation

Once the series for the calculation have been determined, CQG calculates the implied volatility using the following method:

Option price ticks are collected for the selected series. However ticks more than 720 minutes old are excluded:

The series are sorted by month.

The implied volatility vs. the days till expiration is plotted for the selected series within each month.

A regression line is fitted to the points for each month and the implied volatility for the optimal days till expiration (a constant value, assigned separately to each commodity) is taken from the regression line

Note: The optimal days to expiration is derived from the Time Value curve. It represents the number of days just before the time value curve attains its steepest slope, that is, just before the rate of time decay is greatest.

Implied Volatility Parameters

Selecting the Series to Evaluate

CQG initially starts with a baseline of the 3 at-the-money contacts for each month for calls and puts, then several filters are run to eliminate series which would distort the implied volatility calculation.

Filtering the Series

•      Using Minimum and Maximum Days till Expiration

After establishing a strike range, minimum and maximum days to expiration is used to weed out more contracts.

The minimum and maximum DTE are fixed based on the commodity.

Days till Expiration excludes today, holidays, and weekends.

•      Using Strike Prices

To determine which strikes to use when calculating the implied volatility, CQG establishes a strike range (SR). The strike range indicates the number of series for each option type for each expiration month around the underlying price used to calculate the Implied Volatility.

Example: If there were 3 expiration months and the SR was 3 the calculation would consider 3x3x2 (No of Months * Strike Range value * 2 (since calls and puts are considered)) or 18 series.

•      Using the Underlying Price

Option strikes are filtered out if the strike price is greater than the underlying price plus a defined range for the underlying or less than the underlying price minus that range.

The underlying price is the price that occurred at the moment of the option tick.

•      Using Minimum Number of Ticks

Any series which does not meet the minimum number of ticks requirement will not be included in the implied volatility calculation.

•      Using Olympic Rules

After the implied volatilities are calculated for the series still in the running, these series are arranged in order from highest volatility to lowest volatility and a fixed percentage (based on the commodity and number of strikes) of series are eliminated from the top and the bottom to arrive at the series that will be considered in the final implied volatility number.

Calculating Settlement Implied Volatility

To calculate settlement volatility, CQG stops collecting regular volatility ticks when the first settlement tick passes. CQG collects only settlement ticks for the next 20 minutes. Implied Volatilities are grouped by call and put. A linear regression line is plotted for each group. The value of the regression line at the optimal days to expiration are the call and put volatilities for the commodity.

Implied Volatility Constant Parameters Per Commodity

Subject to change