FxWirePro: Bullion market outlook - Time to write OTM puts in 3-way straddle for optimized hedging of gold prices

Gold futures contracts for December delivery on the Comex division of the NYME surges 0.07% to $1,277.74 a troy ounce.

It is reckoned that as per the OTC indications as shown above and the prevailing trend in bullion markets seem to be reasonably addressed by hedging participants, thus, we advocate below option strategy to keep uncertainty in spot gold prices on the check. On trading perspective also, the strategy likely to fetch positive cashflows regardless of underlying price swings with more potential on the downside and with cost-effectiveness.

Hedging Framework:

Strategy: 2m 3-Way Diagonal Straddle versus OTM Put
Spread ratio: (Long 1: Long 1: Short 1)

Rationale: Let’s glance on sensitivity tool, the bullish neutral risks reversals indicate upside risks in underlying spot gold prices, while lower implied volatilities with well-balanced positively skewed IVs signify the put writers’ advantages.

For 2m IV skews would signify the interests of OTM call strikes that means the ATM calls higher likelihood of expiring in-the-money, so writing overpriced OTM puts would be a smart move to reduce hedging cost.

The execution:

Go long in XAUUSD 2M at the money -0.49 delta put, and go long 2M at the money +0.51 delta call and simultaneously, Short 2W (1%) out of the money put. Thereby, we favor bulls as we foresee more upside risks by keeping longer tenors on call leg.