Weekly Volatility Tracker: All That Glitters Is Volatile

The biggest mover last week on the volatility front was gold, as the "gold VIX" (GVZ) closed 40% higher [see charts 2,3]. Recall that when equity index prices rise, implied volatility typically falls; this inverse relationship does not hold for gold and many other commodities. On the contrary, the volatility implied by option prices will often rise with commodity price increases - a state of affairs with significant implications for option traders. We are short some out of the money gold futures options in managed accounts, based not on any directional thesis but rather in order to capture the relatively rich premium here.

The equity volatility indexes (VIX, VXN, VXD, RVX) all closed higher for the first time since August 2nd, but the steady bid in longer-dated volatility futures persists, with a spread of about 4-5 points between the spot and average futures prices [see chart 7]. This relationship was covered ad nauseam over the summer and I will resist speculating about its significance any further for now, except to note that a baseline level of 29 in the VIX futures has not historically been correlated with raging bull markets. The implied correlation index remains elevated [see chart 10].

Comments

[NUCLEAR1929:]

VXX, VXZ is waste of time and money, they don't correlate to actual mid-term or long-term volatility, it's the order book investors buy from a market maker, not REAL VIX.

Sep 09 10:03 AM

[Condor Options:]

Given how new those products are, I think it would be a bit hasty to draw such sweeping conclusions at this point. I don't trade VXX or VXZ since I have access to the CBOE volatility futures. But I disagree with your claim - evidence so far suggests that VXX does track its target range quite well.

Remember that the "real VIX" (if by that you mean the spot VIX) is just a statistic and is not directly tradable.

Sep 14 10:39 AM