Explore Topics and Trends impacting today's markets

Before a recent price surge on the heels of the Israel/Hamas conflict, rising Treasury yields helped spark a decline in gold prices.  Yields have continued to rise because investors are finally starting to believe the Federal Reserve’s determination to keep rates higher for longer. The U.S. Treasury is also being forced to issue massive amounts of new paper into a market where traditional buyers are reducing their purchases.

Additionally, gold has been moving in almost perfect sync to the dollar, only in the opposite direction. These factors have contributed to rising volatility and trading volume in CME Group  gold options. 

Bearish Trend

Gold’s outlook, fortunately or unfortunately, typically has much to do with the underlying interest rate environment. Higher rates raise the opportunity cost of holding gold, which is priced in dollars and does not yield any interest. But, gold is also known to be a hedge in times of uncertainty and during the possibility of heightened geopolitical risk.  

Just prior to the escalation of the Israel/Hamas war, gold reached its lowest settlement since March, and was headed toward potential further declines, with its short-term moving average nearly falling below its longer-term moving average. 

The futures and options market reflected this bearish sentiment through the CME Group Volatility Index or CVOL. CVOL is unique in that it applies a simple formula using out-of-the-money put and call options prices in highly liquid markets to produce a single view of risk expectations for the next 30 days. 

CVOL also measures “skew,” which is the difference in volatility between at-the-money (ATM) options, in-the-money options, and out-of-the-money (OTM) options. Skew serves as an indication of the direction of volatility relative to upside or downside price risk. 

We can see from the chart below that prior to the Middle East conflict, the skew in gold options heavily favored OTM puts. In fact, the skew was at its most negative in over a year.

As of October 2, 5% OTM puts were priced at nearly 20% implied volatility and 5% OTM calls were priced at approximately 15.5% implied volatility. For options expiring in 30 days, 5% OTM puts were priced at nearly 15.5% and 5% OTM calls were priced near 13%. In other words, options traders were positioning for a shift to the downside in the coming weeks. 

But that changed quickly as geopolitical risks heightened, as can be seen in the following graph.

As of October 20, 5% OTM puts were priced at a 17.5% implied volatility and 5% OTM calls were priced at nearly 20.5% implied volatility.  For options expiring in 30 days, 5% OTM puts were priced similarly to the ATM options with little to no skew, and 5% OTM calls were still skewed higher up near 18.8% implied volatility.  Opposite of what the market expected just two weeks earlier, options traders are now positioning for a shift to the upside in the coming weeks, the exact opposite of what they expected two weeks earlier.

CVOL also measures convexity which is used to measure a portfolio’s exposure to market risk.  Convexity is a measure of the ratio of the volatility level of the OTM strikes to that of the ATM, meaning how expensive are the “extreme move” options. When levels become elevated, traders may be looking for an extreme move.

The below chart shows that the concern for an extreme move in gold reached its highest point in over a year in early October.

That sentiment has remained constant as we have seen a surge in prices due to heightened geopolitical risk.

With heightened volatility, market participants are increasingly focused on risk management. More traders are looking to short-dated options to address sudden market events like geopolitical risk or central bank decisions. Gold futures now have weekly options that expire each Monday, Wednesday and Friday, allowing traders more precision around fast-changing scenarios. Gold Weekly options average daily trading volume in 2023 is up 38% over 2022. CME Group also expanded gold offerings by recently launching Micro Gold options.  

As global economic uncertainty persists, understanding the impact of events on gold volatility can help investors and traders more effectively manage the risk of sudden market moves.



OpenMarkets is an online magazine and blog focused on global markets and economic trends. It combines feature articles, news briefs and videos with contributions from leaders in business, finance and economics in an interactive forum designed to foster conversation around the issues and ideas shaping our industry.

All examples are hypothetical interpretations of situations and are used for explanation purposes only. The views expressed in OpenMarkets articles reflect solely those of their respective authors and not necessarily those of CME Group or its affiliated institutions. OpenMarkets and the information herein should not be considered investment advice or the results of actual market experience. Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade. BrokerTec Americas LLC (“BAL”) is a registered broker-dealer with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority, Inc. (www.FINRA.org), and is a member of the Securities Investor Protection Corporation (www.SIPC.org). BAL does not provide services to private or retail customers.. In the United Kingdom, BrokerTec Europe Limited is authorised and regulated by the Financial Conduct Authority. CME Amsterdam B.V. is regulated in the Netherlands by the Dutch Authority for the Financial Markets (AFM) (www.AFM.nl). CME Investment Firm B.V. is also incorporated in the Netherlands and regulated by the Dutch Authority for the Financial Markets (AFM), as well as the Central Bank of the Netherlands (DNB).

©2024 CME Group Inc. All rights reserved