When analyzing implied volatility (IV) most traders use two primary methods. They either compare IV to its historical range or compare IV to historical volatility (HV). From a volatility standpoint, it’s preferable to buy options when vol is low while selling them when vol is high.
How about the current volatility characteristics of the SPDR Gold ETF (NYSE:GLD)? Let’s just say vol is low, very low. Whether it turns out to be too low…. time will tell.
Consider the 3 year IV chart ($GVZ) below. At 14.94, it is sitting at a three year low. From a historical perspective, vol certainly seems on sale. To gain better context, consider how much volatility GLD has actually realized in recent weeks. Current 21 day HV is sitting around 15%, an area it has remained at for the last two months. In comparison to HV then, IV looks relatively cheap as well.
As a result of the low IV environment, short vol strategies have become less appealing while long vol plays have become more appealing. If you’re a stock owner with a desire to reduce risk, how about a stock replacement strategy? You could sell the stock and replace it with a long call option.
There are obviously a variety of other ways traders could place long vol bets here. It really comes down to your directional bias (or lack thereof) on GLD.
ABOUT: Tyler Craig, author of Tyler’s Trading and owner of TC Trading, Inc. Over the years I’ve educated hundreds of traders through my work with one of the nation’s leading educational firms. I enjoy writing and am a current monthly contributor to the Wealth Intelligence Magazine. My writings have also been featured in Expiring Monthly and frequently show up in the Abnormal Returns Options Newsletter. In 2009 I started Tyler’s Trading to share daily market commentary on stocks and options.