Direction of implied gold options volatility linked to direction of gold prices
By Erik Norland, senior economist and executive
director at CME Group
range of commodities, including crude oil and iron ore, have
been on a wild ride over the past twelve months, until recently
gold has been comparatively stable. As such, options on gold
spent the first half of 2015 trading near record lows in terms
of implied volatility. Is the market underestimating the
risk in holding gold?
The direction of
implied volatility on gold options is closely, but not
perfectly, linked to the direction of gold prices. In
gold, as in equities, there is an asymmetric pattern. Implied
volatility tends to rise when prices are falling more so than
when prices are rising. If one is worried about an
increase in gold option implied volatility, one should probably
also be asking what could cause gold prices to fall?
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