MW: Gold, oil traders get new tools to predict the future
New CME indexes gauging volatility seen as a ‘win-win’ for big traders
By Myra P. Saefong, MarketWatch
TOKYO (MarketWatch) — Commodities investors may now have the next best thing to catching a glimpse of the future — of volatility, that is.
On Monday, the CME Group Inc. (CME 282.25, +1.47, +0.52%) launched futures contracts on gold and oil volatility indexes, and will soon offer options on futures contracts. It also has plans to offer futures and options based on corn and soybean volatility indexes.
The new volatility indexes offer effective ways to measure market expectations of near-term volatility in global benchmark markets, said Julie Winkler, CME Group’s managing director of research & production development.
“Market participants can gain direct exposure to volatility and don’t have to account for the price changes of the underlying asset, interest rates and time to expiration, as with other volatility trading strategies using other instruments,” she said.
The volatility indexes measure near-term volatility expectations as conveyed by option-on-futures markets to create new measures of expected volatility over the next 30 days — or the next 60 days for gold — that offer direct price exposure to the underlying spot market, she explained.
And “knowing how fearful or complacent the mood of the market is can definitely help you as a trader or as a hedger entering or exiting the marketplace at the best possible price,” said Phil Flynn, an energy analyst at PFG Best.
The CBOE/Nymex Crude Oil WTI Volatility Index, ticker OIV, is based on market data for West Texas Intermediate crude-oil options on futures listed at the New York Mercantile Exchange and the CBOE/Comex Gold Volatility Index, ticker GVX, is based on gold options on futures listed at Comex. See the CME quotes on the indexes.
Futures on the CBOE/CBOT Soybean Volatility Index and CBOE/CBOT Corn Volatility Index are expected to launch in the first quarter of 2011.
The volatility indexes “provide additional flexibility and diversity to traders’ investment strategies,” Winkler said. “They also allow large option traders to hedge volatility risk in their portfolios.”
Fear factor
Getting a sense of a market’s “mood” is particularly important when the markets are as volatile as the commodities sector has been.
“Although volatility is often associated with fear in the market, it works both ways,” said Sam Kirtley, chief executive officer of SK Options Trading. “Volatility can increase when an asset moves rapidly onto the upside too, so higher volatility is perhaps better described as an indication of price uncertainty in the market.”
There’s been a lot of that in commodities.
Gold futures (GCZ10 1,324, -1.70, -0.13%) recently managed to hit 17 record-closing highs in a little more than five weeks, only to drop more than $36 in a single session Tuesday. Oil futures (CLZ10 80.93, +0.37, +0.46%) ended last year with a 78% gain, and they touched a two-month high this month, while corn (CZ10 565.00, -8.25, -1.44%) and soybean prices (SX10 1,211, +9.50, +0.79%) trade around their highest levels in two years.
