US Equities sold off today and, as opposed to the trend we’ve seen lately, all four major indexes were down by similar percentages of about .5%. Interestingly, even with the Nasdaq down by about 1%, implied volatility in the E-mini Nasdaq-100 options actually ticked down, albeit very slightly. So the divergence from the normal price and volatility correlation relationship continues.
In other CME Group markets, Gold and WTI Crude Oil futures prices both fell by about 1% while US Treasury futures prices at the long end of the yield curve rallied, indicating lower yields.
If you saw today’s CME Group presentation on trading opportunities in the Gold market (and if you missed it, it will be posted on CME Group’s website at https://www.cmegroup.com/events/webinar-gold-futures-and-options-opportunities-for-active-traders.html), our expert panel spent a fair amount of time talking about the relationship between Gold and Silver. These two precious metals are driven by some of the same factors but with some key differences which make them an interesting product pair to trade. During the presentation, the panelists discussed the historical price ratio of Gold to Silver so we thought we’d take a closer look. As you can see in the top graph below, if we simply divide the price of Gold futures by that of Silver futures, we can see that during the volatility we saw in the beginning of March, Gold rallied substantially more relative to silver. Since then, we’ve seen that relationship come back to right about the 1-year average, as silver sort of “caught up”. We thought we’d take a look at the options markets in these two metals products.
The middle graph below depicts the 25 delta Risk Reversal level in the Gold options market over the past 12 months while the bottom graph depicts the Risk Reversal in the Silver options market. The Risk Reversal is defined by the volatility of the Call minus the volatility of the Put so when the level increases, it suggests that the Calls are bid versus the Puts and vice versa. As you can see, in the Gold market Calls and Puts are trading at just about the same vol level; over the past year, Calls have averaged a 2% premium over Puts. However, in the silver options markets, Calls are trading at an vol level 4.2% higher than the Puts versus a 12 month average of 2.5% higher.