Gold – Where’s the Risk?

I’ve kept my eye off gold this year and boy have I missed a ride. The GLD ETF is up about 28% in 2016 which leaves most markets in the dust. Apparently #Gold is a trending topic today on Twitter as well. S0 even though the shiny metal is higher, is there any opportunity being anticipated for the rest of 2016?

To get a feel for what the market thinks, I always consult option implied volatility. Luckily CBOE has the CBOE Gold ETF Volatility Index (GVZ) where I can get an idea if option players (who we all know are the smartest of traders) think more price action for gold is on the horizon. The chart below compares GLD and GVZ daily price action in 2016 through yesterday.

GLD GVZ

GVZ is off the highs for 2016, but still above this year’s average of about 19.   We can take this as the option market is still a bit on edge with respect to future price moves. Traders who like volatility should be happy to hear this. So I took things a step further and look at the option skew for the weekly expirations for GLD from July 15th through August 19th. I grabbed the data from LiveVol and created the chart below.

Gold Skew

GLD was just over 129.00 when I put this together so I looked at options with strike prices from 124 to 134. Note to the left all the lines are pretty flat, with the exception of next Friday’s expiration. Going in the other direction the curves all seem to trend higher. That means out of the money call implied volatility moves up as we go farther out of the money. Another way to think of this is traders selling the puts are not demanding as much premium as call sellers. Traders want to get paid to take on risk and according to this chart they are demanding a higher risk premium to take the other side of call buyers.

So where is the risk? The option guys say the risk is for a move to the upside. Are they right? Time will tell…