Article by: Sixiang Li
Published by: The Volatility Exchange (VolX)
Date: Oct 2012
“The Volatility Exchange™ (VolX®) plans to launch futures and options contracts based upon the realized volatility of U.S. equity indices. The futures version is named VolContract™ futures (VCs), which settle to the VolX indices known generically as RVOL™. The concept is both similar and dissimilar to the popular VIX® index and products marketed by the CBOE®. The two versions are similar in the notion that both VolX and CBOE are trying to provide volatility products to the marketplace. They are dissimilar because the VIX index and consequently VIX futures are based on implied volatility (the relative cost of options) while the RVOL index and consequently VCs are based on realized volatility (the actual, historical movement of the underlying index). VolContract futures are exchange‐tradable instruments that function similarly to a forward‐starting over‐the-counter volatility swap. They are expected to be launched on U.S. equity indices in 2013 and will come in two varieties: a 1‐month calculation period of realized volatility (1Vol™) and a 3‐month calculation period of realized volatility (3Vol™). For a detailed description of how these new instruments work, please visit the web site of The Volatility Exchange at www.volx.us. The goal of this paper is to demonstrate how a VC overlay can enhance the return and/or reduce the standard deviation of an equity portfolio. We chose the S&P 500 Total Return Index on the assumption that VolX will roll out products based upon this index.”
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