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2 Volatility Trackers You Should Be Watching

Over the past few years, the VIX has risen in popularity among investors. With the crash of 2008, investors and financial media became glued to the VIX chart, looking for mean reversion or other sets of tea leaves. Because of this exposure I'd say it's safe to say it's "Cramer-famous," which is sort of like "Oprah-famous" but more of a niche.

Anyways, the VIX always seems to get misinterpreted among mainstream finance currents, and it normally comes through as being bullish or bearish, forgetting the fact that when you include vol you go into another dimension (time) when most investors are focused on a single dimension (price). Essentially, the VIX measures the demand for options on the S&P. This demand may be driven by a need to protect portfolios (fear) but there's also demand for leverage with protection (greed). We normally focus on the latter, but the point is the demand for options is based upon the outlook of how fast traders think the price will move over a certain period of time-- and it's based upon some set of statistical distributions.

So I said all of that to say this: as it's important to see demand for options in equities, it's also important to see it in other asset classes, such as gold and oil.

So I present to you the GVZ and the OVX. These two are analogous as such: {VIX->SPX} {GVX->GLD} {OVX->USO}

Do note that these vol indicies track options on etfs that may not properly track the movement of the underlying commodity; there's contract rolls and structural issues with the etfs to take into account as well. But for all intents and purposes, they do a pretty good job.

As you can tell by the charts below, it seems as though both GVX and OVX, while in major downtrends, could be putting in bases, which means that demand for options on both USO and GLD are starting to flatten out from their downtrend and could possibly turn up.

So if you are to get "bullish" on these names, what does that really mean? Well, it means that you expect the underlying (USO, GLD) to move faster than what the options are pricing in. If you think that's going to happen, then you become bullish on volatility, which is irrespective of any directional bias you may have in price. So if you combine your thoughts on price and volatility, you can begin to formulate some option strategies to make these trades-- my subscribers already have one queued up in one of these two etfs and we're waiting for the correct trigger signal.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/