New Option Product Launches Today

04/12/2011 5:00 am EST


Mark Sebastian

Founder, Option Pit LLC

Options on the gold volatility ETF GVZ begin trading today, and a look at the unique characteristics of these options will help traders to become better prepared to trade the new products safely and effectively.

On March 25, the Chicago Board Options Exchange (CBOE) began trading futures on the CBOE Gold ETF Volatility Index (GVZ). What makes this index a little different is that instead of being based on the volatility of a cash index, the futures are based on the volatility of an ETF, namely the SPDR Gold Trust (GLD). 

The specifications on the GVZ futures are almost exactly the same as those of the VIX futures (the only slight difference in the calculation has to do with the fact that GLD is PM settled).

While the futures themselves are not trading that actively, I expect that to change somewhat quickly once GVZ begins trading options today (April 12, 2011). 

Like VIX, the GVZ options are going to have a few unique characteristics. While traders should know a product’s specifications up and down before they begin trading it, I want to take a moment to point out a few very important details specific to GVZ that traders need to understand.

GVZ, like VIX, is going to be priced off of the forward value, not the “cash” GVZ. Basically, if one wants to know the underlying price, they need to look at where that contract month’s future is trading.  In order to see the price, it’s necessary to have a CBOE Futures Exchange (CFE) feed.

GVZ has a unique expiration date. This is straight off of the contract specifications: GVZ will expire the Wednesday that is thirty (30) days prior to the third Friday of the calendar month immediately following the expiring month. If the third Friday of the calendar month immediately following the expiring month is a CBOE holiday, the expiration date for the contract shall be thirty (30) days prior to the CBOE business day immediately preceding that Friday.

If you do not understand this, simply make sure you are aware of when the option you are short or long is expiring.

GVZ is a European settlement; there is no early exercise to take advantage of short GVZ pops in implied volatility. These options can be exercised only at expiration. Knowing this should help traders understand how the underlying is moving and why implied volatility (IV) is increasing or decreasing relative to changes in realized volatility.

The new GVZ product will almost certainly be an interesting product to trade. I personally have high hopes about my ability to take advantage of movements in GLD volatility using this product. 

Traders who take their time and do their research to learn this product should have a great new trading product to add to their arsenal.  

By Mark Sebastian, COO and director of education,

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