The CBOE Gold ETF Volatility Index or GVZ is a measure of the implied volatility of options on the SPDR Gold Shares (GLD) ETF. Typically GVZ has been at a premium to CBOE Volatility Index (VIX) except in cases where VIX has run to very high levels. However, GVZ has been at a discount to VIX for all but a few days over the past few weeks. GVZ data is available going back to 2008 and has been making all-time lows in recent days. The chart below shows GVZ for 2012 through the close yesterday.
That spike down on the right side of the chart is GVZ closing at 11.97 this past Monday. It has rebounded a bit since, but is still at historically low levels. What this means is volatility is cheap so options on GLD are cheap as well. If you think the markets are going to be complacent over the next few weeks, and that there will be no reaction to a fiscal cliff outcome or some other unknown event then you probably would want to be sellers of options. However, GLD options are cheap and discounting calm waters for at least the next 30 days.
However, if you want to be positioned for a big move that impacts all markets, derivatives related to GLD volatility - GVZ Futures / GVZ Options / GLD Options - are all cheap methods of being positioned in case the markets make a big move in either direction. That's right, either direction.
In addition to being cheap, Gold volatility tends to rise as more of an absolute measure of volatility than volatility on market indexes. In the past a big move in gold prices, higher or lower, has resulted in GVZ moving up. So if you think the stock market is going to scream to the upside and gold will run with it in anticipation of a strong economy, GVZ has historically run up in this scenario. If you believe the economy is going to falter in 2013 and gold prices are going to drop dramatically, GVZ has also rallied in such situations. If trading GVZ is not in your comfort zone, long GLD straddles or strangles are worth consideration as well. Whatever way you want to play it, volatility on gold is cheap and probably will not stay cheap forever.
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