This Week in Gold and Oil Volatility – 7/4/2014

The United States Oil (USO – 38.25) ETF was lower last week as the geopolitical risk in the price of oil seems to be subsiding. We saw OVX rally a few weeks ago when the price of oil moved higher based on increased tension in the Middle East. Now the price of oil starts to trend lower and again we see OVX move lower as well. Commodity oriented volatility moves based the magnitude and direction of the price move in the underlying and 2014 has been giving some textbook examples of this behavior in 2014.

OVX PA 

The SPDR Gold Shares (GLD – 127.16) fund rose slightly last week and so did GVZ.   The price of gold has been very range bound this year and GVZ has reacted to the lackluster price action by trading at historically low levels. However, GVZ did pop up a little last week, which got my attention since we had a long weekend and GLD was very range bound. Broad based volatility measures, like GVZ, usually react to what is going on in the underlying market, but do at times show a little anticipation.

GVZ PA

The chart below is a weekly price chart for GLD in 2014. I have highlighted the 120.00 and 130.00 price levels as that seems to generally be where GLD has been content to trade in 2014. If GVZ moved up a little last week then a breakout or breakdown in price might be anticipated by the GLD option market.

Gold Chart 07032014

The price curves for OVX and GVZ tell a couple of different stories. In the case of OVX the drop in July that accompanied last week’s drop in OVX kind of confirms a lack of concern regarding what is going on in Iraq or Syria these days.  GVZ rose and the July contract rose as well. In addition to July moving higher it also gained relative to the August contract. That ‘bump’ I see in the curve makes me wonder exactly what the gold market is anticipating in the near term.

GVZ OVX

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…