Eldora Gold Resources News-gold’s Insurance Cost Index Explained

The implication? Back then, option traders were pricing contracts with the expectation that gold prices proxied by GLD would likely vary up or down 1.4 percent (16.7 percent divided by 12 months) over a 30-day period.
When GVZ aka volatility is high, writing (selling) naked options and credit spreads are more likely to make money. When GVZ is low, debit spreads and naked option purchases are favored.
Relatively speaking, buying GLD options would have been the play in mid-September. If you were exceptionally prescient, you would have bought calls for a month-long, $130-an-ounce ride up Bullion Mountain.
GVZ peaked at 22.6 percent along with gold prices on Oct. 14. GVZ then signaled a heightened risk of change in gold’s price trend. Now GVZ’s falling along with gold prices, indicating a certain market complacency with the trend.
The Gold Insurance Cost Index measures the risk of price trend changes as well and, as you can see from the chart below, pretty much tracks alongside GVZ. The insurance index is derived by comparing GLD option premiums to SPY contract costs. Each day, puts with at least eight weeks til expiration and each 10 percent out of the money are ratioed: the GLD put premium in the numerator and the SPY premium down below. The daily change in the resulting percentage is then indexed to a base level. In the chart below, the starting date is arbitrarily set as July 23.
Eldora Gold Resources News – The essential difference between the two metrics is volatility itself. The insurance index is more sensitive and generally renders its peak and trough signals a day or two sooner than GVZ. Time can be a great advantage to a trader or a hedging investor giving insurance index followers a bit of a jump on GVZ watchers.
Of course, tracking GVZ is easy. No calculation is required. Its value can be pulled up in real time along with any other market quote.
Which indicator you choose to follow is purely a matter of personal preference. Disclosure: No position
About the author: Hard Assets Investor Hardassetsinvestor.com (http://hardassetsinvestor.com/) is a Van Eck Associates-sponsored, research oriented Web site devoted to sharing ideas about hard assets investing.