The CBOE broadened our choice of volatility investments a little bit today when it introduced options on its gold volatility index GVZ. With GVZ, the CBOE has applied the same methodology that it uses for the VIX index,except it is based on the gold ETF: GLD, rather than SPX, the S&P 500 index.
The GVZ index behavior is similar to the VIX index. In recent quiet times it has settled down to a base level of below 20, but in volatile times it can spike up quickly to much higher values (e.g., 60 during the 2008/2009 crash).
Options on the GVZ share a lot of commonalities with options on the VIX. First of all, they aren’t really options on the index, they are options on the futures for the index. As a result the options won’t track the GVZ index particularly well—except for the one day when the futures terminate and the options expire. On the settlement date there is a special ticker quote (SOQ in the case of GVZ and VRO in the case of VIX ) that establishes the final value of the futures, and the associated options. If you aren’t already familiar with options on VIX your head should be hurting now…
Because of the all-but-one-day lack of guaranteed tracking between the index and the futures GVZ options, like VIX options, are European exercise—they can only be exercised on the day they expire. The GVZ options don’t expire on the typical end of the week expiration date of regular equity options, they are tied to the futures expiration dates which are the Wednesday immediately before or after the equity option expiration date. The Greeks on GVZ options will likely be screwed up on most on-line packages because the software usually shows the underlying as the index, rather than the true underlying—the futures.
If the gold volatility futures mature and get some steady volume, we could see a VXX style ETN that could have options that are equity like, but until that happens traders will have to live with the quirky GVZ, futures based options.
It will be interesting to see how closely the GVZ correlates with the VIX. See this Option Pit post for more information about GVZ options and this Volatility Futures and Options post for more information about the underlying futures contracts.
GVZ option product specifications