Friday was a pretty slow day on the floor at CBOE. I hosted groups from a couple of different colleges mid-day on Friday and there were very few large open outcry trades coming into the SPX or VIX pit while we were on the trading floor. Apparently all the Friday action was in the gold market. GLD finished the week up 1.3% with most of that move coming on Friday. What also resulted from that move in gold was a spike in the CBOE Gold ETF Volatility Index (GVZ) which rose 11.3% on Friday alone. The implied volatility of commodity markets is always unique to the underlying market, but generally it will move up based on a rally or a big drop in the underlying market. GVZ has demonstrated just that over the past few weeks as gold and broken support and then put in a small rally.
The oil market continues to be in free fall with USO having dropped seven consecutive weeks. This persistent downtrend, with no support in sight, has resulted in the implied volatility of options on USO indicating elevated risk. In layman’s terms, that means the market expects continued excessive price moves, either through a quick short covering rebound or prices continuing to drop. The direction of the outlook doesn’t necessarily impact OVX, just the potential magnitude. The level of OVX remains over 30.00 which may indicate that some large price swings are being anticipated by the market.
Both curves are in well-defined backwardation which just reinforces the views from above. As long as these shapes persist expect headlines decrying new lows in gold or oil or a quick rebound from the recent downtrends.