Although the gold spot was unable to breach 1375 mark and sustain above, dear bullion speculators or investors please be mindful that the prevailing dips are not far over 2 and a half year highs, bulls are pretty much on the cards.

Gold prices rose to four-week highs on Friday, as the Bank of England’s decision to lower interest rates continued to support and as investors eyed the release of key U.S. employment data due later in the day.

On the Comex division of NYME, gold futures for for December delivery were up 0.23% at $1,370.55.

Safe-haven demand strengthened after the BoE chose to be aggressive in its monetary policy by easing 25 bps, defying market expectations for additional monetary easing.

ETF holdings increased in July by 2.8% - the sixth monthly increase this year. YTD total ETF gold holdings are up 37.4% (17.5 million ounces), and are at the highest levels since mid-2013.

The implied volatility of 1m XAU/USD ATM contracts is a tad below 15%, (14.9% to be precise), while the skews in these IVs signify the OTC market interest in OTM call strikes.

While, risk reversals continue 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.

Hedging Framework:

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

Rationale: Bidding 1m risk reversals match the IV skews.

As stated above bullion market remains safe-haven demand especially strengthened after the BoE that keeps us eye on shorting expensive puts with shorter expiries. As a result, we capitalize on such beneficial instruments and deploy in our strategy.

How to execute:  

Go long in XAU/USD 3M At the money delta put, Go long 6M at the money delta call and simultaneously, Short 1M at the money put with positive theta.