02 July 2007

A Look At Metals Volatilities

Implied volatilities in the metals I trade (gold, silver & copper) are at the moment, at somewhat of a low. If we go by the traditional option dogma of buying options when vols are low, then on face value, metals options are a buy.

But are they. In my experience, it is not as straight forward as that. Well if you have a clear directional view of an imminent move, then sure, buy a call or a put, or the directional spread of your choice.

The first thing about low volatilities, is that they can stay low for a LONG time, or even go lower. This is generally not a good thing if you are long options. An option trade is also a volatility bet to a greater or lesser degree, depending on the strategy. When we buy options, we are long "vega" which means we preferably want volatility to increase, or at least we want the underlying to start trending. If not, we get chopped to pieces by theta (time decay). If volatility decreases, we lose again.

Lets have a look at the volatility picture of Gold (Copper is quite similar):

IVs are basically a third of what they were a year ago and as yo can see they have been even lower. If the unceasingly bullish Gold Bugs are correct, gold will skyrocket as this credit bubble unravels. Not only will gold fly, but gold IVs will also go berserk. Equally though, I have read credible articles that say go will go the same way as housing, into the pits. Who knows?

The big question is if gold makes a big move, when will it be? Well I have no freakin' idea, but let me show you Silver IVs over th last 2 years:

A similar picture to gold, but with an interesting lift in IV on the back of last weeks dumpage.

Whether this means anything or represents an opportunity, I am pleading the 5th, but I say it's interesting enough for a post on my blog and something to definitely follow.

Stay tuned.


grant said...


Gold & Silver trade inversely to stocks with regard to volatility.

Stocks become more volatile as price drops.

Gold and Silver become more volatile as price rises. Quite why this is the case I'm not really sure, but historically this relationship has been found.

Gold becomes a *fundamental* buy somewhere around $300/oz calculated on a purely inflationary basis of 3.5% since 1932

jog on

w.a.l. said...

There is a relationship between statistical volatility and implied volatility, but implied volatility is also a measure of "fear" in the particular market.

When stocks go down, of course fear rises, (or stocks go down BECAUSE fear rises) so IV rises, but also realized volatility usually increases.

In the precious metals and even copper, rising prices are the result of fear, so the volatility happens on the upside.

This is also the case in most physical commodities, the volatility is on the upside.

A recent example is Soybeans. Fear of lack of supply causes prices AND volatility to rise.

This can be easily seen with volatility skews as well. In stocks , IV skews to the downside, commodities skew to the upside.

Re gold fundamentals: I'm well acquainted with your views on it, and to be frank, lean towards those views, but don't disregard the "gold is money" either, even if it is only now a perception. That perception could bubble (pardon the pun) over into fact.

But picking direction at the moment is a mugs game... delta neutrality would have to be an attractive option.


grant said...


Regarding commodity volatility, that actually makes perfect sense, as I don't trade commodities I have never really given it much thought.

I accept Gold as money, however would you pay $2 for $1...I think not.

The problem is that the financial asset inflation spread to all financial assets [save the Yen] and they are reflecting the speculative premium, the investment value is much lower; housing, stocks, currencies, precious metals etc.

I take it that you are in the UK now? [from UK newspaper article post?]

jog on

w.a.l. said...

Yes agree on the speculative premium thing. I certainly don't think I'd buy gold to put in the bottom drawer at todays price. That spec premium could just deflate.

Buying gold is a straight out punt imo.