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.
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