10 knacks of using Nikkei Volatility Index Futures
10 KNACKS OF USING NIKKEI VOLATILITY INDEX FUTURES
1.
Nikkei VI is an index indicating how the market predicts the market volatility
will be in one month from the spot. ‘For the past two years (April 1, 2012 March 31, 2014), the average was around 24.56 points, so 25 points would be
a good reference point.
2.
Your magic number is 16.
elementary
level
3.
Nikkei VI Futures are products which predict one month volatility from the
expiry of the corresponding Nikkei Futures contract.
elementary
level
4.
Nikkei VI Futures allows you to trade “alert towards the market.” Both Nikkei
VI and Nikkei VI Futures tend to go up when the market become more volatile.
elementary
level
5.
There are some cases where hedging by Nikkei VI Futures could prove costly.
6.
Volatility Indices related ETFs and ETNs are also available.
7.
Let’s create a market alert calendar using Nikkei VI and Nikkei VI Futures.
intermediate
level
8.
Nikkei VI Futures move differently depending on the term structure of volatility.
advanced level
9.
Make sure to find the most cost efficient condition where there are enough market
liquidity and bid-ask spread becomes narrow.
advanced level
10.
Let’s gather information related to Nikkei VI, Nikkei VI Futures.
1
V
elementary
level
intermediate
level
elementary
level
elementary
level
Nikkei VI is an index indicating how the market predicts the market volatility will be in one
month from the spot. For the past two years (April 1, 2012 - March 31, 2014), the average
was around 24.56 points, so 25 points would be a good reference point
1.
Nikkei Stock Average Volatility Index (Nikkei VI) is an index to indicate how the market
predicts the volatility of Nikkei Average will be in one month from the spot. Nikkei VI is
calculated based on the complex mathematical formulas using prices of Nikkei 225 Futures and
Nikkei 225 Options traded in Osaka Exchange.
Similar to Nikkei VI, the CBOE Volatility Index (VIX), which measures the volatility of
S&P500, is also a widely known volatility index (VI). Both indices indicate that higher numbers
indicate that investors are more alert of the market movement in the future.
Taking in account of the recent market conditions, investors are becoming more cautious
when the Nikkei VI is higher than 25 points. Therefore, one should be extra careful on their
risk management when the index price surpasses this level.
(yen)
The historical movement of Nikkei Average and Nikkei VI
20,000
(pts)
Nikkei Average volatility vs. VI (2007.1 – 2012.3)
100
Nikkei225(left axis)
90
Nikkei VI(right axis)
80
18,000
Nikkei VI
16,000
70
14,000
60
12,000
Nikkei Average
50
40
10,000
30
8,000
20
6,000
4,000
2007/01
10
0
2008/01
Period
2001.9～10
2002.9～10
2007.8
2008.1～3
2008.9～2009.4
2010.5
2011.3
2011.8
2013.5
2009/01
2010/01
2011/01
2012/01
2013/01
The events gave shocks to the market during Jan 2001 to Dec 2013
Peak value (pts)
Events
63.44
9-11 terrorist attacks
（2001/9/17）
40.71
（2002/10/9）
Bank stocks dropped due to the concern about non-performing
asset.
47.32
Subprime mortgage problem
（2007/8/17）
49.67
Bear Stearns failure
（2008/3/17）
92.03
（2008/10/31）
Global financial crisis (Lehman shock)
44.00
Greece financial crisis
（2010/5/21）
69.88
（2011/3/15）
42.69
（2011/8/9）
The Great East Japan Earthquake and nuclear issue
S&P downgraded US government bond.
43.74
A big drop in Japanese stocks
（2013/ 5/23）
2
Source: Nikkei
2.
Your magic number is 16.
Volatility is a unit measuring the magnitude of the change in prices. VI is the annualized
index of such volatility which measures the magnitude of the change of stock prices in the
future.
Nikkei VI is one of many VI in the world which measures the magnitude of the change of
Nikkei Average by annualizing the expected one month volatility of Nikkei Average implied in
the market.
What does “Nikkei VI of 24 points” mean?
The market expects the annualized volatility of Nikkei Average in one month period will be 24%.
If the spot level of Nikkei Average is 15,000 yen・・・
It indicates “if the current market volatility continues for one year, the market will be likely to move ±24% (±3,200 yen)
(*1).”
Let’s divide Nikkei VI by 16 (*2) so that you can convert it into daily volatility which is easier to
understand.
Convert it to daily volatility
Convert the annualized volatility of 24% to daily volatility by dividing it by 16: approximately 1.5%.
Assuming that the spot level of Nikkei Average is 15,000 yen・・・
It indicates that “the market will be likely to move ±1.5% (±225 yen) (*1) from 15,000 yen within a day.”
*1
Assuming the return of Nikkei Average is normally distributed with a mean of 0 and a standard deviation of σ,
approximately 68% of the return data exist within ±σ (The part with a red frame in the below chart) . We can
assume such standard deviation σ by using Nikkei VI
<Normal Distribution>
(The horizontal axis: return, the vertical axis: the frequency of occurrence of return.)
The probability that data exist within ±σ is
approximately 68%.
(The part with a red frame)
σ
σ
*2 It is known that the annualized volatility can be converted into the daily volatility by dividing the annualized one by 16
which is equal to the square root of approximate 260 - the number of business days for one year.
3
3.
Nikkei VI Futures are products which predict one month volatility from the expiry of the
corresponding Nikkei Futures contract.
Nikkei VI Futures is a product that predicts Nikkei VI in the future. From the price of Nikkei
VI Futures, we can get the outlook to show whether the investors are cautious about market
movement in the future.
For instance, Nikkei VI future with the contract month X predicts level of Nikkei VI at the
expiry date of the contract month X.
<The summary of Nikkei VI Futures>
Trade content
Bottom line
profits
(In case of
purchase)
Main players
The underlying of the future is Nikkei VI. For instance, April 2014 contract of Nikkei VI
futures will be settled with the closing level of Nikkei VI at the expiry date of April 2014
contract.
In other words, April 2014 contract of Nikkei VI futures is the index future to predict 30
days volatility starting from SQ day in April.
(Nikkei VI on the SQ day - Nikkei VI Futures on the trade day) × 10,000 yen × number of
contracts
Securities firms, foreign investors, retail investors
(Example) Buying three contracts of April 2014 Nikkei VI Futures at the price of 30pts
Assuming Nikkei VI on SQ (4/9/2014) is 32 points, the bottom line profit of Nikkei VI Futures is + 60,000
yen as follows (not considering the commissions).
(32pts - 30pts) × 3 (contracts) × 10,000 yen = + 60,000 yen
VI
Future
4
4.
Nikkei VI Futures allows you to trade “alert towards the market.” Both Nikkei VI and Nikkei
VI Futures tend to go up when the market become more volatile.
As introduced in the first article, both Nikkei VI and Nikkei VI Futures tend to go up when
the market become more volatile.
The below chart plots out the relationship between Nikkei Average and the daily return of
Nikkei VI Futures Index (*) calculated from Nikkei VI Futures’ prices. From this scatter chart,
one can see the following two trends:
1 There is a weak negative correlation between Nikkei Average and Nikkei VI Futures Index.
2 When Nikkei Average makes a big change, Nikkei VI Future Index tends to make a bigger
change and the relationship between Nikkei Average and the daily return of Nikkei VI
future tends to be convex.
→ One might profit from long positioning on Nikkei VI Futures when the volatility of Nikkei
Average is relatively high, especially in turmoil market, and this might help to hedge
against the drastic market movement if you own a lot of equities.
<The scatter gram of Nikkei Average and Nikkei VI Futures in 2013 >
The daily return of Nikkei
VI future
20
15
10
5
0
-5
-10
-8
-6
-4
-2
0
2
4
6
The daily return of
Nikkei Average (%)
*Nikkei VI Futures Index is designed to be linked to the daily price change of the Nikkei VI Futures which is
synthetically replicated with the expiry of 1 month using the first nearby Nikkei VI future contract and the
second nearby Nikkei VI future contract of Nikkei VI future. It is useful to know the price change of Nikkei VI
Futures.
Nikkei VI Futures Index is calculated by the Nihon Keizai Shimbun (Nikkei) newspaper.
5
5.
There are some cases where hedging by Nikkei VI Futures could prove costly.
Nikkei VI future tends to decrease in value under normal market condition (as introduced in
the 8 th article). In such conditions, Nikkei VI future generally trades higher than Nikkei VI and
will gradually trend down to the value of Nikkei VI as time passes to expiry.
As introduced in the 4 th article, Nikkei VI Futures could be a good hedge tool against drastic
market movements, however, on the other hand, the price of the futures has tendency to
gradually decline when the market volatility decreases and the market remains stable. This is
very important concept.
(pts)
<The daily change in Nikkei VI and Nikkei VI Futures>
33
Nikkei VI future will converge to Nikkei VI towards the expiry.
31
29
27
25
23
21
19
2013.09
2013.09
Nikkei VI
2013.10
13-Sep
2013.11
2013.11
13-Oct
13-Nov
6
2013.12
2014.01
13-Dec
2014.01
14-Jan
2014.02
14-Feb
6.
Volatility Indices related ETFs and ETNs are also available.
While Nikkei VI Futures are traded in Osaka Exchange, ETFs and ETNs related to Nikkei VI
and other volatility indices are listed in Tokyo Stock Exchange.
The following table is a list of volatility indices related ETFs and ETNs listed in Tokyo Stock
Exchange. In particular, the ETNs like the NEXT NOTES NIKKEI 225 VI FUTURES INDEX ETN 2035
are directly linked to Nikkei VI Futures Index. This makes it more accessible to the retail
investor.
<ETF・ETN linked to Volatility Indices listed in Tokyo Stock Exchange>
code
name
characteristic
1552
Kokusai S&P500 VIX SHORT-TERM
FUTUREs INDEX ETF
This ETF is tracking yen-converted value of S&P500 VIX ShortTerm Futures Index (Total Return) denominated in USD.
1561
Kokusai S&P500 VIX
FUTUREs INDEX ETF
MID-TERM
This ETF is tracking yen-converted value of S&P500 VIX MidTerm Futures Index (Total Return) denominated in USD.
2029
iPath S&P500 VIX Mid-Term Futures
ETN
This ETN is tracking yen-converted value of S&P500 VIX MidTerm Futures Index (Total Return) denominated in USD.
2030
iPath VIX S&P500 VIX Short-Term
Futures ETN
This ETN is tracking yen-converted value of S&P500 VIX ShortTerm Futures Index (Total Return) denominated in USD.
2035
NEXT NOTES NIKKEI 225 VI FUTURES
INDEX ETN
ETF
ETN
7
This ETN is tracking Nikkei VI Futures Index denominated in JPY
which is synthetically replicated with the expiry of 1 month using
the first nearby Nikkei VI future contract and the second nearby
Nikkei VI future contract of Nikkei VI future.
7.
Let’s create a market alert calendar using Nikkei VI and Nikkei VI Futures.
The volatility term structure is a visualized plot, showing market participants’ degree of alertness
towards the market condition of the near future. This volatility term structure is plotted with volatility on
the vertical axis and the term on the horizontal axis.
While Nikkei VI and Nikkei VI Futures predict the volatility for the respective terms, the volatility term
structure, created by connecting all these points together, allows investors to visualize when and how
much the market will change, much like a forecasting calendar to evaluate the sense of alertness towards
the market condition at different times.
The below chart indicates the volatility term structure based on Nikkei VI and each Nikkei VI Futures
contract. It reveals that the level of alertness towards the market condition remains high, even if the
market is expected to calm down gradually over time.
Nikkei VI and Nikkei VI Futures (as of February 18, 2014)
Nikkei VI
27.67 pts
Nikkei VI Futures
Apr14
May14
Mar14
26.50 pts
26.10 pts
Jun14
26.25 pts
26.25 pts
・Firstly, Nikkei VI and each Nikkei VI future contract are plotted.
Volatility
(pts)
Nikkei VI
(27.67)
Mar14
(26.50)
Spot
Mar14 expiry
Apr14 expiry
May14
(26.25)
Apr14
(26.10)
May14 expiry
Jun14
(26.25)
Jun14 expiry
Jul14 expiry
・Secondary, the volatility term structure is made by connecting those.
Volatility
(pts)
Nikkei VI
(27.67)
Mar14
(26.50)
Spot
Mar14 expiry
Apr14 expiry
May14
(26.25)
Apr14
(26.10)
May14 expiry
8
Jun14 expiry
Jun14
(26.25)
Jul14 expiry
8.
Nikkei VI Futures move differently depending on the term structure of volatility.
As introduced in the 7th article, the volatility term structure shows the how alert market participants are
towards the market movement between terms. The historical data indicates that the volatility term
structures are usually upward sloping under normal market conditions while it shifts downwards sloping
under volatile market.
[Under normal market conditions]
The short-term volatilities tend to stay low as the market is
expected to be stable. On the other hand, the longer-term
volatilities would be higher than the short-term volatilities
because there is uncertainty in the outlook for the long term.
Thus, the term structure would tend to become the upward
sloping in such conditions.
[Under volatile market conditions]
When the market expects volatile movement in the short
term but gradually less volatility in the long term, longerterm volatility would be lower. Thus, the term structure
would tend to become downward sloping in such
conditions.
Volatility
Volatility
←Short term
←Short term
Long term→
Long term→
Time to option expiry
Time to option expiry
Nikkei VI Futures tend to move depending on the volatility term structure. As written in the below list, Nikkei VI Futures tend
to go down when the volatility term structure would be the upward sloping, and tend to go up when the volatility term
structure would be the downward sloping based on data in 2013.
th
As written in the 5 article, you can find that Nikkei VI Futures tend to go down gradually under the normal market condition
(i.e. there is a cost of going long Nikkei VI Futures). Please keep this in mind.
<The relationship between the volatility term structure
and the performance of Nikkei VI Futures in 2013>
# of business days when volatility term structure was
upward sloping in 2013 (*1)
# of business days when volatility term structure was
downward sloping in 2013 (*2)
32/245 business days
128/245 business days
Nikkei VI future went up when
volatility term structure was
upward sloping (*3)
Nikkei VI future went down when
volatility term structure was
upward sloping
14/32 bus days (44%)
18/32 bus days (56%)
Nikkei VI future went up when
volatility term structure was
downward sloping
Nikkei VI future went down when
volatility term structure was
downward sloping
70/128 bus days (55%)
58/128 bus days (45%)
The average daily return of Nikkei VI future when volatility term
structure was upward sloping
The average daily return of Nikkei VI future when volatility term structure
was upward sloping
-0.23%
+0.37%
The above analysis was made based for 245 business days during 2013.
*1
*2
*3
“Upward sloping” in volatility term structure is defined when “Nikkei VI < first nearby Nikkei VI future” and “first nearby Nikkei VI future <
first nearby Nikkei VI future”.
“Downward sloping” in volatility term structure is defined when “Nikkei VI > first nearby Nikkei VI future” and “first nearby Nikkei VI future >
first nearby Nikkei VI future”.
“Nikkei VI future went up when volatility term structure was upward sloping” means “the first nearby Nikkei VI future went up on the next
business day immediately following the volatility term structure was upward sloping.
9
Column: Why does the Nikkei VI future tend to change subject to the shape of the volatility
term structure?
As explained previously, the term structure of volatility could change over time. In such case, Nikkei VI Futures will have fewer days until
maturity, which can be illustrated as it moving forward along the implied term structure curve.
♦ When the volatility term structure is upward sloping
▸
▸
Assuming the volatility term structure remains unchanged through time, Nikkei VI Futures will likely decline over time (Fig. 1 and 2).
Holding a Nikkei VI Futures contract is very similar to holding a put option in terms of time decay where the option value decrease over
time (paying for the theta). (Fig. 1 and 2) Chapter 5 is an illustration of this tendency.
Fig.1：The current volatility term structure
and Nikkei VI future with expiry X
Fig.2：If the current volatility term structure remains
unchanged in 40 days, Nikkei VI future with expiry
X will go down.
40 days later
Volatility
Volatility
The current
Nikkei VI
future with
expiry X
Nikkei VI
future in 40
days
Nikkei VI future with expiry X indicates
this 30 days’ implied volatility.
Forward volatility comes
down along the curve.
Nikkei VI future with expiry X goes down
over time.
Term
Term
Spot
Expiry X
Spot
Expiry X + 30days
Expiry X + 30days
Expiry X
♦ When the volatility term structure is downward sloping
▸
▸
Assuming the volatility term structure remains unchanged through time, Nikkei VI Futures will likely rise over time (Fig. 3 and 4).
As the market regains its breath, volatility usually declines significantly, and term structure would likely flatten (Fig. 4 red line). In such
case, Nikkei VI futures will decline, but the longer term futures contract will have a milder drop than the near term ones.
Fig.3：The current volatility term structure and
Nikkei VI future with expiry X
Fig4：If the current volatility term structure remains
unchanged in 40 days, Nikkei VI future with expiry X
will go up）
40 days later
Volatility
Volatility
Nikkei VI
future in 40
days
The current
Nikkei VI
future with
expiry X
Forward volatility
comes up along the
Nikkei VI future with expiry X goes up
over time.
Term
Spot

Expiry X
Term
Spot
Expiry X + 30days
Expiry X
As introduced in the first article, Nikkei option prices affect Nikkei VI because Nikkei VI is calculated using Nikkei option prices. For example, under the
normal market conditions, investors tends to buy relatively longer dated options (i.e. not very short term but 2~3months options). Thus, the volatility term
structure tends to be upward sloping. The current shape of the volatility term structure is assumed to be supported by this kind of demand-supply trend in
the option market. Consequently, the Nikkei VI future tends to move subject to the shape.
Expiry X + 30days
10
9.
Make sure to find the most cost efficient condition where there are enough market liquidity and bidask spread becomes narrow.
One should pay attention to the bid-ask spread when purchasing Nikkei VI Futures. Let’s examine what
one should keep in consideration upon purchasing Nikkei VI Futures using the following diagram.
Nikkei VI futures (Feb 24 PM 2:40)
Spot
Bid
Offer
Open Interest
March 2014
27.00 pts
26.65 pts
27.00 pts
490
April 2014
25.80 pts
25.80 pts
26.00 pts
417
….
….
….
….
….
June 2014
--
25.50 pts
26.60 pts
64
For example, one could buy the April 2014 contract at 26.00 points, however, to profit from selling
this contract, the buyer must keep in consideration of the trading cost coming from the bid-ask
spread as well as to one’s speculation towards the price in the near future. Therefore, it is important
to take in account of the spread cost when making decisions to monetize one’s view.
On the other hand, June 2014 contract is offered at 26.60 points but with a 1.10 bid-offer spread,
which is much higher than the April 2014 contract. Unless there is particular reason, it might be
better to trade in more liquid contracts, or wait for more liquid hours or until the bid-ask spread
becomes tighter.
11
10.
Let’s gather information related to Nikkei VI, Nikkei VI Futures.
OSE
GO
Click on “Futures & Options” on the OSE homepage.
Click on “Nikkei 225 VI Futures” on the OSE homepage.
Information about Nikkei VI Futures:
-Comprehensive explanation.
-Contract specifications.
-Detailed trading example under “How to use.”
12
GO
Contract Specifications on Nikkei VI Futures
Contract Unit
Tick Size
Trading Hours
Contract Months
Last Trading Day
Settlement
Daily Price Limit
Nikkei VI × ¥10,000
0.05 points (¥500 per tick)
9:00 - 15:15 (no night sessions)
8 nearest serial contract months
A trading day which ends on the business day immediately preceding the day (if it falls upon an OSE non-business
day, it will be advanced) that is 30 days prior to the 2nd Friday (if it falls upon an OSE non-business day, it will be
advanced) of the calendar month immediately following each contract month
1. Resale or repurchase
2. Final settlement (cash settlement with final settlement price)
1.
(a) Price limit range: 10 points above/below the reference price
(*) Basically, the upper or lower price limit will be expanded by 5 points when the Circuit Breaker is triggered
(no limitation on how many times the price limit range will be expanded).
2.
Margin
(b) Immediately Executable Price Range: 10 ticks (0.5 points) above/below the midpoint of the latest best bids
and offers.
Calculated by using SPAN®
(Margin offsetting with other stock index futures and options contracts is NOT allowed.)
13
Attention




In addition to common risks of futures trading, a short position of Nikkei VI Futures contracts has specific risks based on the
characteristics of fluctuation in Nikkei VI. Therefore, investors who do not have sufficient assets and experience should avoid taking a
short position in Nikkei VI Futures contracts.
Nikkei VI may soar when markets decline. In such case, a short position of Nikkei VI Futures contracts will cause much greater loss than
that in stock index futures contracts.
Also, Nikkei VI has a tendency to regress to a certain range (around 20pt to 30pt) after a rapid increase.
In the following actual case, Nikkei VI rose by approximately 74%, while the Nikkei Stock Average fell by approximately 6% in a day. As
shown, Nikkei VI can exhibit extreme moves in a short period. Therefore, it is not advisable to trade Nikkei VI Futures in circumstances
where it is not possible to obtain the real-time price information.
March 14, 2011(close)
Nikkei Stock Average: 9,620.49 yen (-6%)
Nikkei VI: 40.72 pts (+74%)
March 11, 2011(close)
Nikkei Stock Average: 10,254.43 yen
Nikkei VI: 23.44 pts
The fluctuation of Nikkei VI has characteristics different from that of a stock index such as the Nikkei Stock Average. Please fully
understand the characteristics of Nikkei VI before trading Nikkei VI Futures.
●The descriptions in this publication are intended solely for the purpose of providing information on futures and options. Losses may be
incurred due to fluctuation of prices of futures and/or options, etc. and the entire deposited margin or a portion of such may be lost. Losses
may also exceed the deposited margin. Investors must carefully review the documents provided by their financial services provider before
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through methods independently developed by Nikkei Inc. (Nikkei). Nikkei owns copyrights and any other intellectual property rights to
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Indexes. Nikkei shall also have the right to discontinue publishing Nikkei Indexes.
● The "Nikkei Stock Average Volatility Index" (hereinafter referred to as "Nikkei VI") is copyrighted works calculated through methods
independently developed by Nikkei Inc. (Nikkei). Nikkei owns copyrights and any other intellectual property rights to the Nikkei VI and the
methods used to calculate the Nikkei VI. All the business and trading regulations on futures contracts based on the Nikkei VI shall be
managed under the responsibilities of Osaka Exchange, Inc. and its participants. Accordingly, Nikkei, which manages the Nikkei VI
commissioned by Nikkei, shall not assume any obligations or responsibilities for related business and trading regulations. Nikkei shall not be
obligated to continuously publish the Nikkei VI. Nikkei shall not be liable for any error, delay or discontinuation of publication of the Nikkei
VI.
Nikkei shall have the rights to make any changes in calculation methods and any other elements or contents of the Nikkei VI. Nikkei shall
also have the right to discontinue publishing the Nikkei VI.
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