A strategy idea for options trading investors.

Traders engaged in volatility forecasting focus on identifying when implied volatility is at extremes. These seem to be the times when its behavior is easiest to predict. For example, when the CBOE Volatility Index (CBOE: VIX) gets stretched to the upside it’s easy to take a short volatility stance in anticipation that the VIX will drop back down over time. However, when the VIX is chopping around in a range it’s much more difficult to make heads or tails of its next movement.

Gold bugs will be happy to note the implied volatility on the SPDR Gold Trust (NYSE: GLD) options has dropped to extremely low levels making long volatility plays quite attractive.  As shown in the chart below the IV Index Mean (gold line) is sitting just below 14% — a level not seen all year. These fresh lows are a result of falling demand for GLD options.

To exploit what could be a volatility bargain traders should consider long volatility plays in GLD. Here are three ideas:

1.  Traders owning shares of GLD looking to reduce their exposure may consider a stock replacement strategy by liquidating their stock position and substituting it with a long call option.

2.  Traders with a bullish bias on GLD may consider buying a call option outright. The strike price and expiration month selected will depend on the expected duration of the trade.

3.  Traders thinking these cheap options may be under-pricing GLD’s ability to rocket higher or plummet lower in the coming month may consider entering an at-the-money August straddle by purchasing the GLD Aug 149 Call and GLD Aug 149 Put. At current prices the straddle is pricing in a $6 rise or fall in the stock by August expiration.

Source:  Ivolatility.com

At the time of this writing Tyler Craig had no positions on GLD.

Follow Tyler Craig on Twitter@TylersTrading.