07 October 2009

Gold Volatility Popping Again

As we all know gold is breaching all time highs right now and leading on from my post yesterday http://www.internationalstockforums.com/index.php/topic,4.0.html there is some interesting developments from an option trader's point of view in that implied volatility (vis a vis option premium) is spiking well above current realized volatility.
Here is the last three months of volatility history on GLD (Gold SPDR)

As is obvious, implied volatilities are well over the odds. As you would expect, most of the meat is in the higher strikes as shown by this skew graph:

This means call option buyers, particularly OTM call option buyers need further dramatic rises to turn a profit, whereas on the face of it, writers would have an edge here. That's on the face of it. Who you be game to write call options here? Not this little black duck; not yet. I've got some naked put shorts I wrote at the end of august in anticipation of the seasonal gold bull, plus trading the moves with various strategies, but would I write more puts here?

Well I prefer to write puts at potential pivot point lows and that ain't here. (With the caveat that it has to make statistical sense to do so)

This situation is still developing from my point of view and worth watching for a nice writing opportunity. The $64,000 question is whether realized volatility catches up with implied, or whether gold bugs are just having another "Gold to $5,000 oz" party, are wrong again and IVs collapse back to current reality. We would need some very strong moves, relatively, to justify this IV.

Stay tuned.


callum said...

What I think most people don't realize, is that the gold price is in USD and the USD is still a safe heaven. If the world was about to blow up tomorrow, the USD would appreciate like crazy (more so now that it is the new carry currency) and any depreciation against gold would be muted.

Write all the call options you can.

If you want an inflation hedge, buy McDonalds.

Wayne said...

Interesting (and not so common) perspective callum.

Even so, I'm not so sure I'd bet against the gold bugs (and the tide) just yet. Every bull can be slain however, its time will come.

Tyler Craig said...

Very Nice Post-


Wayne said...

Thanks Tyler

I've not seen your blog before, nice one, have added to my links.


Tyler Craig said...

Thanks Wayne-

I found yours from a mention on Bill's VIXANDMORE

Keep up the good work.

jamesbp said...


Hi, can you tell me what software / broker you are using to provide vol analysis ... which looks great ...


Wayne said...

Sent you an email James.