Commodity related implied volatility tends to react to a break of support or resistance through an upside move. Often implied volatility will drop when a commodity is stuck in a range or a test of support or resistance holds. We actually have a case of both going on right now. I’ll start with support holding in the Gold market.
Before the equity markets took over the headlines there was a lot of buzz about gold which was testing lows put in late last year. GVZ moved up as there was some concern a breakdown in price, but the support level has held for the mean time. The illustrations are below with a weekly GLD chart along with last week’s GVZ action.
I did want to note the spike on Wednesday – that was when the stock market was really experiencing a scary day, the result was a rise in volatility across all markets that didn’t last for too long.
The oil market has been making headlines as the price of oil has been hitting low prices not seen in years. This drop in the price of oil pushed the CBOE Oil ETF Volatility Index (OVX) to levels not seen since April of 2013. Again, here’s a weekly chart, but this time of the United States Oil ETF (USO), showing a break of support and then a chart showing how elevated OVX was for the past week.
OVX was already over 30 as of last Friday and spent the whole week in the 30’s based on the break of support along with some big swings in the price of oil.
The volatility term structure curves always tell a more complete and longer term story. I’ll repeat something I say often about following the volatility markets – if you are not looking at the term structure in addition to the spot index you are not seeing the big picture. The big picture for Gold, based on a flat curve is that the jury is still out on this support level holding. A return to contango could be taken as an endorsement of the support line around 114.50 being solid support that is expected to hold. The OVX term structure is in backwardation which can be interpreted as the market expecting oil volatility to come down in time which would mean the price of oil stabilizing at some time and developing a new range.