When looking at a volatility index, we normally see an inverse relationship like we see with the VIX and the S&P 500. However, does this inverse relationship hold up with looking at different commodities?

Today, Tom Sosnoff and Tony Battista look at the volatility indices associated with Gold (GVZ), Oil (OVX) and the Euro (EVZ) to see if there is a relationship similar to the VIX/SPX. They find out that while volatility can expand whether the underlying is moving up or down, it tends to expand much quicker to the downside. This increased volatility expansion provide the guys with additional trading opportunities!

Tony: Thomas, we're back my friend! Market Measures! S & P trading near their highs of 1275, Nasdaq up 31, Russell up 9, they're up the same percentage, DOW lagging a little bit, up 70, …
Tom: I cannot believe these bonds stayed down 105 this morning and up 3 ticks now. And we had them, had them Johnny. Notes, I didn't put any notes …
Tony: It took half a point, I mean ..
Tom: I know, I know, but hey last case, this case …
Tony: This is a private that has a 1% move, is outside of its normal expected move.
Tom: I think we're live on audio only. Now, finally.
Tony: You think we're live on audio only now.
Tom: I think we're live on audio only. Finally they …
Tony: You think we have an audio-only feature so that we're not sucking up everybody's data on the …
Tom: If they don't …
Tony: …on the video stream for our app.
Tom: That's right, which finally Apple approved. So, you've asked for it and we've delivered it. If you haven't used the tastylive apps, by the way, they're awesome. More people are watching tastylive on … via our new android and IOS app than ever before, so thank you so much. We are well on our way to 100,000 viewers and we need to get there by the end of 2015, so we give you everything. All's you got to do is tell people about us. I appreciate it. Well, my screen is very green today, bet. I don't like all this green. We did sell some S & P's. We are going to lean to the side of getting a little bit more short, getting a little shorter up here. We have to. We've been very diligent. We've barely …
Tony: That's what we've been built to do.
Tom: We've been built to do that, Tony. We've barely nibbled, actually. Nasdaq features up … we've scalped them all day … they're up 32 handles right now, I mean and …
Tony: I mean, the only down ticks that we've had in the market, to be quite frank with you, are the few covers that you've made on some of these scalps.
Tom: We've bought every bottom somehow. I don't know how frequent we've done that but, let's see, where've they gotten up to 31? Nasdaq a little off, some at 30. So, nothing scientific about this. Just continuing to just leak some out. What did we say? Limp in from the short side. A limp-in. S & P's higher, Nasdaq's higher, Russell's higher, our pairs trades down a little bit of money from yesterday. Crude's higher, Bonds higher, Node's higher, Gold's higher, Silver's higher. Nasdaq fills no matter where you put the orders in. That's …
Tony: (laugh) If you're selling, yes.
Tom: If you're selling they'll take it anywhere. Yen's higher - that's good. Euro's higher. We needed those. We needed help from a couple of kids today. We got help from …
Tony: Just sold Nasdaq for 4330.
Tom: We got help from the Yen, we got help from the Euro. We're getting closer, especially in the Yen. We could sure use 80, oh, no we're not. What am I saying?
Tony: Ninety…
Tom: Need some 86's is up there. Looking around stocks, we've just got to get some more positions on again. We took off a lot … are there earnings plays tonight?
Tony: No, not really. Groupon's something we're not going to look at. Zinga's got nothing anymore, so no. No really earnings plays.
Tom: Where is Groupon right now?
Tony: I'll give it to you. $7.
Tom: Really?
Tony: It was around …
Tom: I can't trade Groupon.
Tony: It's 7.60.
Tom: I'm not supposed to trade Groupon, but I'm telling you, it seems like the cheapest stock on the board that actually has a …
Tony: It's got a tight market, 2 cents wide, and you know, great volatility … 115% in February. Monthly option's 217% in Feb. 75 in the back month.
Tom: I'm probably getting myself …
Tony: Certainly an opportunity.
Tom: I'm probably getting myself in a huge mess of trouble just like we did the one time in Zinga, you know. Putting out positions that were too big because the stock was too cheap.
Tony: It worked out though.
Tom: Where's Zinga right now?
Tony: What do you think? I looked at it already.
Tom: I was … I haven't looked at it in 3 months at least. I would say, last time I looked at it, it was like somewhere between $2.50 and $3.00.
Tony: Sold! (laugh) $2.65. Good work.
Tom: $2.65? God, that stock hasn't gone anywhere.
Tony: You said $3.00, hm?
Tom: Talk about not rewarding your shareholders. Okay. Look at Cisco, you little pig. You came back down there at 29. You got me in that little rally up.
Tony: You know what? You don't pump the barrier. You said it didn't have any flight risk, so it said "I'll teach you". 29 for the 8, now how do you feel?
Tom: We're …
Tony: I mean it's up 2 dollars on $1.20 expected move, so …
Tom: It's a fairly large position on there and I'm not afraid to say we're down to very single digits, so I'd probably take the whole thing off here just to move on and say it was a nice scratch. Okay, so we're short a few S & P's and we're short a few Nasdaq features and that's it. Oh, I know what I wanted to do. I want to put the Scott Snyder trade off.
Tony: The Scott Sheridan trader? Yes, yes. Matter of fact, [inaudible 00:00:00] was just asking me about that.
Tom: I'm going to do that next, coming up on Good Trade, Bad Trade.
Tony: Good! Good, good, good. So now I don't have to tell him about it. Beautiful.
Tom: Yah, I forgot about that. I have too many friends named Scott. It's weird. We have friends …
Tony: ….with Scotts and Tonys.
Tom: Scotts and Tonys, yah.
Tony: You are. Bonds unchanged. VX traded $17.74. That's a big move in there that we haven't seen recently. It's been going a little bit lower trading almost up to $22.00 down to $17.00 and change now, but that's still a big move.
Tom: We're still going to put that trade on. I'd love to see a reversal in Apple today. Could we just whack some Apple, please?
Tony: Yah, Apple …
Tom: Can we do like a little Apple experiment? Coming up this …
Tony: Here, hold on. Look at this. Look at this, seriously.
Tom: What?
Tony: Look at this $7.00 move in the last … it's up almost 8 1/2%.
Tom: I don't know what you're looking at. Oh, that's Apple.
Tony: Sorry. It's coming up now.
Tom: Yah, that's your Carl move. I wanted to shove this down his throat. So …
Tony: You could still get in. It's going at $2.15. Didn't he say $2.15 or something like that?
Tom: Sorry. I can't take it anymore. I don't have time to trade it right now.
Tony: 34 rank, coming up a little bit … not great.
Tom: I just can sell some stock. I just don't have time for anything else right now.
Tony: Sell stock, sell puts?
Tom: No.
Tony: Darn, I'm just asking.
Tom: Stinking puts. All right. Commodity volatility. This is our market mission today. We're running a few minutes behind schedule. You will like this. Commodity volatility. the VIX is the most common Commodity Volatility product which is calculated from using a strip of option prices from the SPX. We've talked about this a gazillion times at length on this show over the last couple of years. But, just remember, VIX volume has gone down a lot in the last couple of months. We've become very sophisticated about the value of hedging. It's not all what it's cranked up to be. The… also has other volatility products and other various commodities. See, what's happening is, the more we learn, the more we decide 'Okay, there's these other trades we can make', which is the coolest part. So, today we take a look at some of the other products that are out there with respect to volatility. Oil volatility is OVX, Gold volatility is GVZ, and the Euro volatility, which I didn't even know there was one, is EVZ. There's an underlying feature and there's a corresponded ETF on our new correlation study guide. I think they have all this …
Tony: Programmed in?
Tom: We use ETF's for all commodities just to make it simple, so we're tying everything together here. So oil/CL,USO,OVX. OVX gold/CGLD is the physical and GVZ.
Tony: Just sold Apple.
Tom: Yah, sold a little Apple at $27.16?
Tony: That's correct. $127.16.
Tom: $127.16. And then lastly is the Euro, and of course,FXZ and EVZ. Perfect. We know that the VIX and the SPX tend to be negatively correlated, but does this hold true for other commodities and their associated volatility products? Let's see. So, the first line is the VIX and the EXPY. The second line is the USO and OVXY. The third line is GLD and GVZ and FXE and EVZ. Now, what you're seeing here is very different than the inverse. So, in other words, stocks go up, volatility goes down. Volatility goes up, stocks go down. That's the inverse of a highly negative correlation, but in commodities it's much less so. You'd see a little bit of it in USO, but you don't see any of it in GLD, you almost don't see any of it in FXE., which means that there's no relationship necessarily between price and risk. So, what you're thinking about in that case is, when volatility jumps up in GLD, you should be selling it. When volatility jumps up in FXE you should be selling it. Now, when volatility jumps up in VIX, you should be selling it, but understand there's a much more interesting relationship in that case with its corresponding underlying. And, to a certain extent, the same thing in USO. In USO there's, let's say, a half a point in correlation. It's very interesting now that we're breaking down volatility by sector, and we're also seeing where are the best … like, I used to think that if gold's having a huge upmove, volatility must explode. But, based on this, that's not the case.
Tony: That's right. Right. It's the same thing …
Tom: … up or down.
Tony: Right. Correct.
Tom: So, to get a better perspective on these vol products we looked at the averages of the index for these last 5 years. Then we looked at the USO, GLD and FXE to determine the change in volatility, given the large price move over a one month time frame. If you're new to tastylive, don't get freaked out by Thursdays, because we do some heavy stuff from points during the week. Jacob is over everybody's head. If you're thinking he's over your head, yes, he's over my head, Tony's head, everybody else's head here. Maybe we got 1 or 2 people that can stay in the same room with him, but we're talking about everybody else. It's tough. That's what this stuff should do. It should challenge you on every level, and say, 'Hey, you know what? I want to get there'. We see the GLD and it's corresponding volatility index that vol can expand both in up and down moves, but it's still, overall, negatively correlated for most of the time. So, here's what we have. GLD in the blue, and there's the GLD vol, I'm sorry, there is gold volatility on the other side. All we're trying to point out is the argument for almost indifference to, like maybe …
Tony: Volatility's high, you just sell it and trade it appropriately. If volatility's low …
Tom: What's appropriately?
Tony: Well, forget about where the stock prices … because I look at this and you look at April 2012 to 2013 and gold chopped around a little bit, but you can certainly say that it had some nice up moves in 2012. I would have thought that volatility was going higher. That's the way I would have looked at it. And, I'm learning now that if volatility's high as it was going higher in 2011, you look to sell volatility. If volatility is low, I'm not expecting it to necessarily expand but I'd treat it with the appropriate strategy, not necessarily anticipating on waiting for gold to expand volatility-wise.
Tom: So, what I've learned in school this summer is that in 2013 I've tried to be very directional in gold and silver, 2012 and 2013, because I thought that that's what I was good at. What I realized is 'Oh my God, I'm not good at this and I don't want to take that silver pain from way back then anymore'. So, what I've recognized now, and this has taken over - this is consuming in 2015 - is that my trades in GLD right now … I haven't picked a single direction this year. I have just been wrapped around that 120 level in GLD, just selling premium every time volatility gets expensive and I haven't had a losing trade in GLD yet this year. It's only 6, 7 weeks into the year, but I haven't picked a single direction in gold. Now, I've picked a couple of directions, I've picked a little bit of a lean to the bullish side in SLV, and that's worked too. All we've been doing in there is selling puts, but the same thing. Every single time volatility gets high we'd sell puts in silver, and we haven't really started to think about it much. It's just keep that position no matter what. Every time volatility gets up just sell whatever you can, and so far so good. Okay.
Tony: Agreed.
Tom: So, again, what we did here is we just took a look. Below we show the average volatility change in GVZ, given whatever the move is in gold … 1%, 3%, 5% … on average we see that the larger down moves, the greater the impact on volatility. And again, there's a little bit of a takeaway because it seems like more people are trading gold from the long side. I guess that's an understatement. Everybody tries to trade gold from the long side. So, when gold starts to go down, they pack a little bit more. That's all. So, GVZ, when gold drops by 5%, GVZ goes up by 15%. So, the panic in gold comes to the down side , which if you would ask me this, I would say to the up side.
Tony: Of course.
Tom: I thought all the panic was to the upside. So we see here we talk about panic to the upside, and it's really all the down side. tony, hang on one second because we're going to have the opportunity to buy back some of these …
Tony: S & P's 2077 in change.
Tom: No, I was thinking the Nasdaq feature just sold at 30.
Tony: At 30, they're trading …
Tom: 4 and 1/2.
Tony: That's correct. 43.24 now.
Tom: Got them back. Now you make 5 and 1/2 points on a day like today on a bunch of them and you just count your blessings and move on. I think on the S & P side I think we sold them a little bit cheap, so we'll cover some of those and then we'll try to reload at higher prices.
Tony: And, you're also covering those because you took a profit in the other ones too, right? I mean …
Tom: Of course. Of course. All right, anyways, so that's gold. A little bit different than we thought. So now we're talking about crude. So we've seen volatility reaching near 5 year highs. By the way, we do that all the time here. It's confusing to some. You get used to it after a while, but we're fully transparent in that if you want to you can see every single thing that we do and you can see everything that a lot of people that follow us and that trade on DOW do as well. On the homepage of DOW or through Bob the Trader, which is a pay-for app. It's the only that we sell is Bob the Trader and Bob the Trader IRA. That's it. So, during a recent sell off in crude we see a volatility reaching near 5 year highs. And, again, an OVX closing price and USO closing price. You can see the relationship between those 2. Okay, we're at … man, this would be a massive extreme right now.
Tony: Sure would be.
Tom: Would be the biggest one we've seen since going all the way back 5 years. I mean, as far as the highest closing price in oil volatility and the lowest closing price in oil. That's one of the reasons right now …
Tony: We're trading oil, you know that. I mean, that's not news.
Tom: Yah. This is one of the reasons I don't understand how people can't be short premium. You have to be short premium right now on oil. So, what we're seeing here is currently the volatility of OVX trading much higher than average at 62.3 and again, you look at the tie frames here. So, USO's move of 1, 3 and 5%, and it's the same thing in oil right now. USO goes down, volatility goes up. so, the fear is, just like gold, the fear is right now in commodities, the down side Bought back the S & P's we sold at 2076. 25, and the only reason we do that is we thought we sold them a little cheap so we'll lay them out if they bounce back on both sides.
Tony: A small cour …basically a scratch.
Tom: It's a scratch. And, we just sold some Apple too, you know, just to … you take 36 cents out of it right now if you wanted to.
Tony: One …
Tom: Sold at 16, it's trading at 80.
Tony: 127.16, correct and it's trading at 126.81.
Tom: I'm always like, I'm on that 50 cent range, you know.
Tony: That's why they call you 50 cent boy. The floor does.
Tom: I'd be very happy with 50 cents, because on the floor days you'd be happy with 12 cents.
Tony: 6.25, who are you kidding?
Tom: So, anyways, that's a great look at … and again, I'm not providing the takeaways for this yet, except for that when oil goes down and volatility pops up and it's higher than the average, you've got to sell it. So, when you, and listen, I know we got hurt. I know we got hurt with this, but we're going to make it all back.
Tony: Sure.
Tom: You know all that oil vol that we sold, all the puts and oil in the 60's and 70's and low 80's, we're going to get all that back because it's too rich right now. We sold it too cheap back then, not knowing …now we're selling …
Tony: You never know!
Tom: …now it's a switch.
Tony: It's always going to happen. You never paint the top on volatility, and when you do you don't remember if you do it anyway.
Tom: As the Euro continues to fall you see volatility EWZ spike to recent highs, and if you start to … I'm sorry, EVZ, so you see FXE in blue, you see EVZ in red, you see that kind of at the widest range. This is, again, another example of underlying goes down, volatility goes up. You know, if we were to venture a guess a while back, we would have said that the relationship in a commodity, commodity mind you, commodity goes up, volatility goes up. Commodity goes down, volatility gets killed. It's exactly the opposite. So, I'm going to argue that it's not that obvious, it's not that easy, even to a veteran trader. It's bullshit when they say they have any idea, because they don't, and this is very much a bull market phenomenon in equities and a bear market phenomenon on commodities. I think you'll see huge reversal trends over the next couple of years as these markets both normalize, and in this case, volatility and marketplace both normalize.
Tony: Let's take a quick break, we've got …
Tom: Ho, ho ho ho hold it …we've gotta get to this last page.
Tony: I know, but people just like it when I do that to you. They said it to me yesterday. Tweeted out to me, "cut him off … it's always good" (laugh).
Tom: It's funny? You think it's funny? It hurts.
Tony: If you had a heart it would hurt.
Tom: It hurts. Okay, so we see here is significantly higher spikes in volatility in FXE. One has a large down move compared to the same move on the up side. And again, I would have argued that with all these commodities you get a large up move. People love to buy this stuff. They're all kind of this trend trader stuff, and here's a perfect example. It doesn't work. The play here is 'sell the vol'. Look, FXE down 5% and the vol's up 32%. Now, I know it's easier to move vol that's really cheap.
Tony: Sure.
Tom: You talk about 10% vol it's easy to move it 3% to get the 32% move, but still.
Tony: Yah. We'll take a quick break, we'll come back. We got Good Trade, Bad Trade!