Volatility Results in Aggressive Action in the Gold Options Market

There has been a clear trend in the last few weeks that when gold investors fear a double-dip recession or another global financial crisis, they rush to the options market and place aggressive bets. These gold bulls have had company in the past one month - traders who wanted security against a dip in bullion prices. Following a couple of days of price drops, many of these traders were worried that a steeper fall was impending, resulting in heavy action in the market this week. 

Implied volatility rising 

Gold options are accompanied with an important measure - implied volatility. This is an estimate of the extent to which traders expect prices to rise or fall. The biggest surge in this measure in two years was seen over the past month. The measure has doubled since the first few days of July. 

Nevertheless, for many, this is not a surprise, as the implied volatility in the options market has a tendency to rise in tandem with volatility in the real market. Several gold traders in the options market are employing put options to mitigate their risks. This is a result of the metal’s recent inability to sustain upward momentum for few days consistently, beyond $1,900 per ounce.

This was also the second time in a short span of three weeks that the market had dropped after hitting a record high. According to the president of Trade Alert, Henry Schwartz, a new high was seen in open interest in SPDR Gold Trust (GLD.P) related aggressive call options. The GLD.P put open interest also went from 1.6 million lots to 2.8 million. In the same period, call open interest and put open interest rose by approximately 78%. 

Gold rising and falling with risky assets

Many investors have been concerned about gold’s propensity for dipping and spiking with other risky assets. This is especially so after the sharp rally in gold prices since the beginning of August this year. Spot gold price had seen an increase of nearly 13% in just 12 sessions.

According to analysts, one of the factors that has contributed to the rise in volatility of gold prices is a spike in aggressive bets that prominent hedge funds in the US have placed in gold options.

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