On March 25th, the CBOE began trading futures on GVZ, the CBOE Gold ETF Volatility Index. 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 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 on April 12th. 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 the product, I want to take a moment to point out a few very important details that are 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, one need to look at where that contract month’s future is trading. In order to see the price one will have to either have a CFE feed, or convert that month’s option into a synthetic futures price (read here to learn how to do that). In understanding this, traders should be aware that it is likely that most of the retail trading platforms are going post the Implied Vol’s of the options based on the GVZ cash (a similar situation to how most calculate VIX, which can be very misleading (even dangerous?) for investors.
GVZ has a unique expiration date. This is straight off of the contract specifications: GVZ will expire: The Wednesday that is thirty 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 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. Knowing this should help traders understand how the underlying is moving and why 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 as to my ability to take advantage of movements in GLD volatility using this product. Trader’s that take their time and do their research to learn this product should have a great new trading product to add to their arsenal. I will be discussing this in further detail on my blog at Option Pit.
For more information about GVZ, please visit www.cboe.com/GVZ
COO and Director of Education