CBOE Special Feature: Gold -- Where the Volatility is Cheap

Tickers in this article: GLD SPY VIX

Russell Rhoads is an instructor with The Options Institute at the Chicago Board Options Exchange . He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies and is the author of Option Spread Trading: A Comprehensive Guide to Strategies and Tactics. Russell also wrote Trading VIX Derivatives: Trading and Hedging Strategies using VIX Futures, Options and Exchange-Traded Notes. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois - Chicago and acts as an instructor for the Options Industry Council. There has been a lot of press and attention given to the low level of VIX these days as it is stuck in the mid-teens. Even on days the S&P 500 appears to be breaking down, VIX has not really moved too much. Because of this you see many articles calling options or portfolio insurance is fairly cheap. Where volatility is really cheap these days is in the Gold market.

The CBOE Gold ETF Volatility Index or GVZ is a measure of the implied volatility of options on the SPDR Gold Shares (GLD) ETF. Typically GVZ has been at a premium to CBOE Volatility Index (VIX) except in cases where VIX has run to very high levels. However, GVZ has been at a discount to VIX for all but a few days over the past few weeks. GVZ data is available going back to 2008 and has been making all-time lows in recent days. The chart below shows GVZ for 2012 through the close yesterday.



That spike down on the right side of the chart is GVZ closing at 11.97 this past Monday. It has rebounded a bit since, but is still at historically low levels. What this means is volatility is cheap so options on GLD are cheap as well. If you think the markets are going to be complacent over the next few weeks, and that there will be no reaction to a fiscal cliff outcome or some other unknown event then you probably would want to be sellers of options. However, GLD options are cheap and discounting calm waters for at least the next 30 days.

However, if you want to be positioned for a big move that impacts all markets, derivatives related to GLD volatility - GVZ Futures / GVZ Options / GLD Options - are all cheap methods of being positioned in case the markets make a big move in either direction. That's right, either direction.

In addition to being cheap, Gold volatility tends to rise as more of an absolute measure of volatility than volatility on market indexes. In the past a big move in gold prices, higher or lower, has resulted in GVZ moving up. So if you think the stock market is going to scream to the upside and gold will run with it in anticipation of a strong economy, GVZ has historically run up in this scenario. If you believe the economy is going to falter in 2013 and gold prices are going to drop dramatically, GVZ has also rallied in such situations. If trading GVZ is not in your comfort zone, long GLD straddles or strangles are worth consideration as well. Whatever way you want to play it, volatility on gold is cheap and probably will not stay cheap forever.

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