Scott Nations, President of Nations Indexes, joined The Option Block podcast on The Options Insider Radio Network this week to discuss volatility and the launch of the new futures contract (ticker symbol: VLQ) based on the Nasdaq-100 Volatility Index VOLQ.
Scott is the creator of the Nations VolDex® methodology on Nasdaq-100 Index options. Tune into this episode to hear Scott discuss VOLQ’s importance to traders as more and more portfolios are now looking like the Nasdaq-100. Listen in as Scott explains how VOLQ is different from traditional volatility measures in that it focuses on precisely at-the-money implied volatility as opposed to every out-of-the-money option listed in the front couple of months.
According to Scott, “As a trader, as a guy who actually stood in The Pit, whenever you would walk back into an option trading or now when people sit down at an options trading desk, the first thing you want to know is ‘What is the at-the-money implied volatility?’ You would always hear someone asking ‘What's the straddle?’ Well that’s shorthand for ‘What's the at-the-money (ATM) implied volatility?’ And that is what VolDex and VOLQ measure.”
ATM is the most important measure, according to Scott. From there traders can fill in the context of what they see. This is different from traditional measures of implied volatility, which will have hundreds of deeply out-of-the-money options involved in it.
The VIX, for example, uses a huge range of options, some of which are more than 50% out-of-the-money. Thirty days to expiration and some options more than 50% out-of-the-money. And according to Scott, those aren't really useful options. “Those are lottery tickets,” he says. Traders used to walk into the pit and essentially ask what is VolDex. Nobody's ever walked back into a pit or nowadays, sat down at an options trading desk and said, “Please give me a strike price weighted average of every out-of-the-money option that's listed in the front two expirations.” That's not how people look at volatility even though that's what VIX is.
Listen to the entire podcast here.