Condor Options

Volatility Tracker for the week of November 23, 2009

News-making price changes in gold [11] have not been accompanied by any particularly noteworthy behavior in the options market. While it would be wrong to suggest that options in any way “anticipated” the gold rally, it is also fair to say that price action in the underlying has been roughly in line with the expectations given by option prices.  Notice that the CBOE’s VIX-style gold volatility index (GVZ) has drifted between 20 and 30 since early September.[3]  The spread between the 21-day historical volatility of GLD and the implied volatility in its options 21 days ago has not changed noticeably in recent months, whether we inspect this relationship visually [12] or as a ratio.[13] All of this should count in favor of prices staying near or above current levels for the short term.

The ratio of short- to long-term implied correlation discussed here last week took a serious turn lower as expectations declined significantly for correlation among S&P 500 stocks in the near term.[10]  My comment that accurate stock-picking may start to matter is looking like more than a tired bromide.

The primary correlation that most market observers are watching is that between equities and the U.S. dollar.  I expect to have some research up later this week putting that correlation in historical context.