Ahead of the key US policy rate decision next week, the August reading of CPI inflation is due today. Although this is not the Fed’s preferred inflation measure, it nevertheless provides a first indication in how inflation evolved last month.

More generally, we expect headline inflation to rise gradually over time, but it is sufficiently contained for now to enable the Fed to put off a rate hike until December. The data indicated that the Fed is likely to leave interest rates unchanged at its next meeting, which is scheduled for September 20-21.

The risk-on sentiment and hunt for yield that prevailed in the past few months, benefiting emerging-market assets, was based on a belief that central banks were going to provide more stimulus as the Fed stands pat.

Since the bears in Gold have wiped off buying interest, for now, the price has been tumbling consecutively from the last couple of days and on the Comex division of the NYME, gold futures for December delivery were steady at $1,318.50.

Hedging Framework:

The implied volatility of 1W XAU/USD ATM contracts - 16.6% and 13.95% for 1m tenors.

While, risk reversals are still signalling upside risks, considering above fundamental developments in bullion markets we think the opportunity lies in writing an OTM put while formulating below strategy for gold's fluctuation at this juncture.

3-Way Options straddle versus Put
Spread ratio: (Long 1: Long 1: Short 1)

Rationale: Bidding short term risk reversals with writing 1W OTM put contracts,

As stated above, since Fed in next week’s monetary policy likely to maintain status quo in its funds rate, bullion market may gain momentum on safe-haven demand sentiment would be strengthened.

So, shorting expensive puts with shorter expiries would reduce the cost of ATM straddles.

How to execute:  

Go long in XAU/USD 2M At the money delta put, long in 4M at the money delta call and simultaneously, Short 1M (1%) out of the money put with positive theta.

Please be noted that the tenors chosen in the diagram are just for demonstration purpose only, use appropriate tenors as stated above.