Signal du Jour - Short Vol in GLD

High implied volatility and a shiny signal.

Last week, we talked about the importance of trading the regime you're in. Jumping the gun on a regime switch can be catastrophic for your PNL. On the flip side, stubbornly sticking to a strategy that's no longer working because the regime has changed is just as bad.

We also discussed a sweet spot in the market—high implied volatility combined with a regime of expanding realized volatility. If you haven't read that piece, I highly recommend doing so, as it serves as a primer for today's signal.

In this article, we'll shift our focus to GLD, the ETF that tracks movements in precious metals.

Let's dive in.

The context

GLD has had a remarkably bullish year so far. The ETF is up 5.32% in 2024 and added an impressive 8% in February alone. This performance has left many analysts scratching their heads—Gold is traditionally considered a safe-haven asset that investors flock to when things become uncertain. Needless to say, the current market conditions have been calm and very positive for riskier asset classes.

Some experts suggest that the metal's appreciation is due to lingering concerns that the fight against inflation in the US is not over yet. Investors may be looking to gold as a way to hedge against a potential stagflation scenario. Indeed, inflation in the US remains elevated, and it's not far-fetched to think that many investors might turn to gold as a store of value, particularly if the Fed ends up cutting rates later this year, effectively decreasing the value of assets denominated in dollars.

Another explanation we've frequently come across is that the combination of a high-rate environment and geopolitical tensions has driven central banks to rebuild their gold reserves, driving up demand and prices.

To be honest, we can't definitively favor one explanation over another: they all seem plausible, but what truly matters to us is the level of volatility in the asset.

33% appreciation in 18 months - quite the bull run in GLD

Since hitting its lows in September 2022, GLD has appreciated by nearly 33%. Following a massive spike in realized volatility at the end of 2024, the asset has gently drifted higher while realized volatility has remained subdued.

Meanwhile, a reconstruction of the VIX index for GLD reveals that options prices have remained relatively elevated, particularly towards the end of February.

The reconstitution of a VIX like index shows that options in GLD are getting more expansive.

This recent spike presents an opportunity for volatility sellers.

Let’s have a look.