Volatility Tracker: No Runaway Reflation

Tue, Oct 13, 2009 | Jared Woodard

Volatility Tracker

Volatility Tracker for the week of October 12, 2009

Traders have become increasingly focused on the role that the dollar is playing in exacerbating rallies in equities, gold, and other assets, with concern in some quarters about a more precipitous dollar decline to come. At least on the implied volatility front, there’s no sign of such worries yet. EVZ, the index that tracks VIX-style implied volatility for FXE (a EUR/USD ETF) is pushing to new all-time lows. Note that sudden price spikes in recent history correlated with moves higher in implied volatility; however, the relentless trend of summer and fall 2009 has not seen any corresponding increase in implied volatility. I regard this as confidence among traders that there is little concern of a dramatic rise in EUR/USD, even if the current trend does continue.

When gold closed above $1000 some weeks ago, that move was accompanied by a significant rise in implied volatility.[3] However, the break above $1050 in recent sessions has not seen a similar confirmation – not of the same magnitude, anyway – in implied volatility, which may be a contrarian signal that traders are not concerned about a runaway gold rally. Gold certainly looks overbought on a price basis. [11]

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  1. Volatility ETFs Continue Freefall: Time To Buy? | ETF Database Says:

    [...] A significant portion of these losses have come in the last seven trading sessions, each of which has seen a further slide in the “fear index.” But even after losing 75% since its peak in November 2008, the VIX still remains about 15% above its long-term historical average (and 20% above its long-term average prior to May 2008). Still, given the fragile nature of the economic recovery, the potential for surprises in the upcoming earnings season, and less predictable Fed behavior in coming quarters, investments in VIX futures are becoming an interesting option. [...]

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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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