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GVZ, The CBOE Gold Volatility Index - Options Coming April 12 by Mark Sebastian

by contributor on 04-07-2011 03:01 PM - last edited on 04-28-2011 12:43 PM by Administrator

On March 25th, the CBOE began trading futures on GVZ, the CBOE Gold ETF Volatility Index.  What makes this

index a little different is that instead of being based on the volatility of a cash index, the futures are based on the volatility of an ETF (namely GLD).  The Specifications on the GVZ futures are almost exactly the same as those of the VIX futures (the only slight difference in the calculation has to do with the fact that GLD is PM settled).

 

While the futures themselves are not trading that actively, I expect that to change somewhat quickly once GVZ begins trading options on April 12th.  Like VIX, the GVZ options are going to have a few unique characteristics.  While traders should know a product’s specifications up and down BEFORE they begin trading the product, I want to take a moment to point out a few very important details that are specific to GVZ that traders need to understand:

 

GVZ, like VIX, is going to be priced off of the FORWARD value, not the ‘cash’ GVZ.  Basically, if one wants to know the underlying price, one need to look at where that contract month’s future is trading.  In order to see the price one will have to either have a CFE feed, or convert that month’s option into a synthetic futures price (read here to learn how to do that).  In understanding this, traders should be aware that it is likely that most of the retail trading platforms are going post the Implied Vol's of the options based on the GVZ cash (a similar situation to how most calculate VIX, which can be very misleading (even dangerous?) for investors. 

 

GVZ has a unique expiration date.  This is straight off of the contract specifications:  GVZ will expire: The Wednesday that is thirty days prior to the third Friday of the calendar month immediately following the expiring month. If the third Friday of the calendar month immediately following the expiring month is a CBOE holiday, the Expiration Date for the contract shall be thirty days prior to the CBOE business day immediately preceding that Friday If you do not understand this, simply make sure you are aware of when the option you are short or long is expiring

GVZ is a European settlement; there is no early exercise to take advantage of short GVZ ‘pops’ in implied volatility.  Knowing this should help traders understand how the underlying is moving and why IV is increasing or decreasing relative to changes in realized volatility.

 

The new GVZ product will almost certainly be an interesting product to trade; I personally have high hopes as to my ability to take advantage of movements in GLD volatility using this product.  Trader’s that take their time and do their research to learn this product should have a great new trading product to add to their arsenal.  I will be discussing this in further detail on my blog at Option Pit.

 

For more information about GVZ, please visit www.cboe.com/GVZ

 

Mark Sebastian

COO and Director of Education

Option Pit Option Mentoring

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Comments
by aparis on 04-07-2011 07:22 PM
Options

I wrote a second part to this piece on my blog, with a third piece coming either here or there in the near future.

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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