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Market analysts attributed the rise in gold prices at futures trade to positive global cues.
As we previously explained when we recommended going long Dec’16 CME gold, we believe the constructive environment for relative safe haven gold demand brought about by unconventional monetary policy and macroeconomic risks will only intensify over the next year and half.
Moreover, we especially see a constructive environment for gold in the first and fourth quarter of 2017 (with quarterly prices averaging $1,450/oz) as western-based relative safe haven demand is compounded by increased physical buying in India and China during the wedding and festival seasons.
As such, we also see attractive value in owning the Dec’17 CME gold contract, especially after prices have retraced a bit since earlier in July.
Longs in Dec’17 CME gold at the prevailing spot price of $1,332 oz as on today are welcome for the trade targets at $1,490/oz.
Safe-haven demand strengthened after the major central banks are holding their bank rates unchanged in their monetary policies, defying market expectations for additional monetary easing.
The precious yellow metal prices soared to a 15-month peak in the recent past, gold futures for August delivery on the Comex division of the NYME inched up $1.65, or 0.12%, to trade at $1,330.85 a troy ounce by 06:56GMT.
OTC Observation: The implied volatility of 1W XAU/USD ATM contracts 14.73% and 15.27% for 1m tenors.
While, risk reversals are still signaling upside risks, considering the strong uptrend and above fundamental developments in bullion markets we reckon the opportunity lies in writing an OTM put while formulating below strategy for gold's fluctuation at this juncture.
Hedging Framework:
Strategy: 3-Way Options Straddle versus OTM Put
Spread ratio: (Long 1: Long 1: Short 1)
The Execution:
Go long in XAU/USD 2M At the money delta put, Go long 4M at the money delta call and simultaneously, Short 1M (1%) out of the money put with positive theta.
Rationale: Bidding on positive risk reversals with writing 1m OTM put contracts while having ATM longs in the same direction reduces the cost of hedging, while ATM Calls, on the other hand, likely to mitigate if the gold prices keep rising.
We just let the time decay maximize the profit now. Happy to cash in Theta advantage by the month end.
