Commodity Volatility Indices: OVX and GVZ

The present research will examine the most popular commodity volatility indices proposed by the CBOE: the OVX and the GVZ. It is important to point out that this study is the second component of a bigger research whose first part is entitled “Equity Volatility Indices: VIX, VXN, VXD, RVX” . The analysis will follow the structure presented in the first half and it is aimed to provide pivotal volatility levels. (The HyperVolatility Forecast Service provides market projections for the VIX, Gold, WTI crude oil and many other asset classes. Send an email to and get a free 14 days trial). Before getting started it is worth reminding that the OVX is a volatility index based on the performance of the options written on the USO (United States Oil Fund) while the GVZ is calculated on options written on the SPDR Gold Shares Trust. The next chart displays the ranking of both commodity volatility indices:

Commodity Volatilities: Distribution Ranking

The most important levels to observe are the 25%, the median and the 75% ones. The OVX has a median value fluctuating around 32.8% while the GVZ is much lower and, on average, it does not get higher than 18.1%. In case of low volatility environments the OVX remains around the range 29% – 30% while the GVZ tends to oscillate around 16%. On the other hand, high volatility days would probably see the OVX moving around 37% while the GVZ does not usually surpass the 21.3%. These levels are crucial to anyone who wants to trade oil or gold volatilities because they will provide buy / sell signals for options traders. Let’s list some of them (remember these are not recommendations but only a general rule):

1) Long Gold or WTI Oil volatility when the OVX is below 30% and the GVZ is around 16%

2) Range trading strategies, such as condors or butterflies, should be adopted when the OVX is higher than 35% and the GVZ is above 19%

3) If the OVX or the GVZ are fluctuating around their median levels, it implies that some major movement is about to occur. Therefore long volatility strategies could be implemented when the OVX is around 30% – 31% and the GVZ is in the 17% – 18% interval.

The fact that a volatility index has a high value does not mean that it is the most volatile one. We already tried to address this issue when dealing with equity volatility indices so now we will attempt to explain such a phenomenon for commodity volatilities too. The next chart plots the volatilities for the OVX and GVZ indices:

Volatility of Commodity Volatilities

The chart clearly displays the volatility of both commodity volatility indices. The relationship between the OVX and the GVZ is positive, in fact, the correlation between the 2 indices is +0.77 while the correlation between the volatility of the OVX and the volatility of the GVZ is +0.62. It is interesting to notice that the 10% – 13% interval is a key mean reverting level in both markets because all the time the volatility of the OVX or GVZ touched this level both asset classes experienced a major volatility explosion. The next chart shows the distribution ranking for the volatility of commodity volatility indices:

Volatility of Commodity Volatility: Distribution Ranking

The distribution ranking demonstrates that the GVZ, although lower than the OVX in volatility points, is more volatile than the OVX index. Specifically, GVZ’s volatility oscillates on average around the 18% while the OVX’s oscillation rate does not go higher than 13.3%. In low volatility environments the oil volatility index’s fluctuations rate is not lower than 10.6% while gold’s index oscillations rarely gets lower than 13.9% (these are the mean reverting points for the volatility of commodity volatilities). On the other hand, volatility explosions are not higher than 20.7% for the volatility of the OVX and 22.5% for the GVZ. Now we can improve on the list of buy/sell signals we previously mentioned (again these are not trading recommendations but only a general guide):

1) Long Gold or WTI Oil volatility when OVX’s volatility is around 10% – 11% or when GVZ’s volatility is within 13% – 14%

2) Condors or butterflies, should be entered when OVX’s volatility is higher than 19% – 20% and the GVZ’s one is above the 20% – 21% interval

3) If OVX and GVZ volatilities are oscillating around their median values some long volatility strategies are definitely safer than selling straddles or naked options. Hence, when the volatility of the OVX is around 13% – 14% and the volatility of the GVZ is in the 18% – 19% interval, it is a good risk management practice to hedge the portfolio against a potentially higher degree of market fluctuations

If you are interested in trading gold futures or options you might want to read our research “Trading Gold and Silver: A Realized Volatility Approach”

Instead, if you are looking to trade WTI oil futures or options you will find the research “The Oil Arbitrage: Brent vs WTI” very helpful

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