CBOE Holdings recently announced plans to launch futures and options on the CBOE Gold ETF Volatility Index (GVZ). The CBOE Gold ETF Volatility Index (“Gold VIX”) is calculated using the same CBOE VIX methodology applied to options on the SPDR Gold Trust (Ticker – GLD). The Gold VIX is an estimate of the expected 30-day volatility of GLD, calculated using real-time bid/ask quotes of GLD options that are listed on CBOE.
Pending regulatory approval, CBOE Futures Exchange expects to begin trading the futures on March 25, and the options a few weeks later. JLN Options editor Sarah Rudolph spoke with John Hiatt, Director, Research, at the CBOE to get a little more background on the upcoming products.
Q: What is the relationship between the GVZ and the underlying index?
A: First of all, of course, the GVZ is a volatility contract. Typically, everyone cites the relationship between the CBOE’s VIX and the S&P Index itself as an inverse correlation. The relationship with our volatility index on gold is slightly different. When the S&P 500 goes up, the VIX typically goes down, but that’s not always the case with the GVZ. Historically, the price of gold itself is not particularly volatile, but it certainly goes through periods where it does become volatile. With the commodity price inflation we’ve seen recently, gold is at more than $1,400 an ounce. That’s where the interest is from the CBOE’s perspective. Volatility has picked up for gold.
Q: Could you explain the inverse relationship between the GVZ and the index?
A: It’s a bit different from the relationship between the CBOE’s VIX and the S&P 500 Iindex. The VIX and the SPX have a fairly straightforward negative correlation, which only gets stronger when the S&P is down. But with the GVZ, you might see the price of gold go up and the volatility go up as well.
Q: Is the same formula used for VIX and GVZ?
A: We use the same formula as for the VIX, and it includes the out-of-the-money puts and calls. We calculate the GVZ value based on the prices for options on the GLD ETF.
Q: How can people use the futures and options on the GVZ? Can individual traders use it?
A: Anyone can use it to take a measure of how expensive options on the GLD Trust are going to be relative to historical levels. As you know, any volatility index is a measure of the cost of option premiums.
Another way to use the index is as the option market’s expectation of the future distribution of prices for GLD. The higher the level of GVZ, the broader the expected range of prices in the future for GLD.
Finally, the upcoming GVZ derivatives contracts can be used to manage volatility risk. Anyone with a position in gold that has “optionality” in it has volatility risk.
Q: Could you explain optionality?
A: If I buy a call option on GLD, that call option is not a delta product like the ETF itself, so you have volatility risk. Part of the change in the price in your option has to do with the expectation of the volatility of GLD. A derivative whose price is only dependent on the expectation of volatility is therefore a very useful hedge.
Q: Options on ETFs have become very popular of late. Is this true of options on the GLD?
A: Yes, options on the GLD is one of the most active ETF options traded at CBOE.
Q: What was the impetus for creating the GVZ futures and options?
A: Basically, we are trying to replicate the success we had with VIX, using other assets. In 2008, the only exchange-disseminated volatility index was based on equity options. However, volatility is an important risk measure in several other assets. CBOE had just begun trading options on ETFs that reflected prices in these markets, so a volatility index based on these option prices seemed a natural extension of what we accomplished with VIX. The first one we created was the OVX, which is based on the price of options on the US Oil Fund ETF (USO). And GVZ followed shortly afterward. Those were first two volatility indexes based on an asset other than an equity index.
Later, in 2010, we calculated gold and oil volatility indexes, under a license agreement with the Chicago Mercantile Exchange. The CME uses our calculations for listed options and futures on the OIV and GVX.