Are You Watching the “VIX for Gold?”

09/16/2010 12:01 am EST


Steven Place


GLD made a technical breakout today, hitting all-time highs, but I feel that it may be undersubscribed. I took a quick look at a few major financial news sites and the GLD news was not above the fold; rather, it was being treated as back-page news. It feels as though there hasn’t been a good bout of speculative fervor in the shiny-but-lacking-intrinsic-value asset, so it’s definitely worth a look here.

Here’s the interesting part—in the GLD options market, we saw two things happen today:

  1. Option volume was above average. We saw 227k calls and 184k puts traded, compared to an average of 93k and 81k, respectively. Clearly, the option players were in as we did see a very fast move on the open. This could be a contrarian sign, but here’s the interesting part…

Click to Enlarge

2. GVZ is near 52-week lows. GVZ is like the VIX for GLD options; it measures the supply and demand for options premium. GVZ behaves differently than the VIX in that you will sometimes see positive correlations with GLD and GVZ, whereas the VIX/SPX correlation is around -.80. That is because there is a higher upside “risk” as gold running higher is often perceived as a fearful, hyperinflationary trade. But we didn’t see a huge pop in the GVZ and it’s still very low.

Click to Enlarge

That is telling us that the expected pop in GLD is being undersubscribed in the options market, and the overall sentiment is confirming it. It’s as if the move to all-time highs in gold is being brushed off as a trading opportunity. This could make for a very nice contrarian momentum play, structuring your risk with call buys or delta-positive straddle buys.

By Steven Place
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on OPTIONS