So what’s the best hope for a lift in the CBOE Volatility Index (VIX) in 2010? How about the recent uptick in volatility in gold?
Here’s the 10-day historical volatility in the SPDR Gold Trust (GLD) over the past six months:
The vertical dotted line corresponds to the beginning of December, so as you can see, we have a near doubling of typical volatility levels from the past half year.
You always have to consider the possibility of volatility from one asset class moving across to other asset classes. This is especially true here, as the dollar and gold trade were so tied into the stock trade of 2009.
But there’s one problem: Gold has to believe in the volatility lift first. And, so far, it does not seem to.
Below is a chart of GLD’s 30-day implied volatility from the last half year:
Basically, we saw an initial surge in volatility, but it has now tapered off to near 22. That’s a level that’s truly neither here nor there, as it’s right at the midpoint of this time frame.
Which leads to the next question: Is there a volatility play in GLD itself?
Well, as you can see, GLD options significantly overpriced GLD stock volatility from July into early December, pretty much like every other name we look at. But, unlike most everywhere else, it eventually paid off to overpay.
If you think we saw the worst of the shakeout, options represent a pretty nice short here, even after the recent sell-off. You’re getting 5 to 7 points higher volatility to sell GLD options here than in the SPDR S&P 500 (SPY) and PowerShares QQQ Trust (QQQQ), yet typical GLD stock volatility is roughly similar to QQQQ and SPY.
Of course, it looked that way a month ago, too, and then GLD got whacked.
So, bottom line, if you have a mind to short options, I like GLD better than the index plays, but I’d also advise playing it safe and stick to spreads.
Short an out-of-the-money (OTM) put spread if you’re bullish or an OTM call spread if you think the highs are in. Or do both (i.e., an iron condor) as a general bet that we won’t see much motion here.
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