Condor Options

Volatility Tracker for the week of September 8, 2009

The biggest mover last week on the volatility front was gold, as the “gold VIX” (GVZ) closed 40% higher. [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. [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. [10]