FxWirePro: Gold’s puzzle between triple top and rising wedge amid indecisive technical indicators – Write exorbitant calls/puts to short strangles

The gold (XAUUSD) on daily terms: Bullish engulfing patterns have occurred at 1332.05 and 1347.12 levels that counter the previous formation of double top and on track of forming the triple top pattern as bears resume at 1356.78 levels.

These bullish patterns have occurred after testing strong support at neckline, but this cannot be isolated as stern bulls rallies as RSI, and stochastic curves have been indecisive and MACD on the other hand also signals indecisiveness.

You could make out that the price has been oscillating between 1365 and 1306.40 levels since 3rd January.

Despite the bullish DMA crossover, the prices are stuck between 7DMA and 21DMA as RSI and stochastic doesn’t confirm bullish momentum convincingly and MACD has also been indecisive.

On a broader perspective, we must appreciate the bullish strength of this precious metal price as the intermediate trend has been spiking through rising wedge pattern, and especially after the strong test of support at around $1300 mark, on the flip side, bears resume exactly at rising wedge resistance (refer weekly plotting).

Both leading oscillators have been indecisive even in this timeframe.

While same has been the case with trend indicators, both MACD and EMAs are also indecisive to signal further uptrend.

Hence, long-term investors can wait and watch out closely for decisive breach below 1365-68 levels for a safe play with long hedges.

Accordingly, we recommend buying delta-hedged 3M XAUUSD 25-delta risk reversals @ 1.3/1.6 vol in order to arrest bullish risks.

Please glance through the option pricing of OTM call and OTM put that seem to be exorbitantly priced-in. 1w (0.5%) OTM calls are trading at 85% more than NPV, whereas the IVs of these tenors are trending just shy above 10.7%. Hence, one can easily spot out the disparity between IVs and option pricing.

Well, on speculative basis, writing expensive calls and puts are recommended to establish short strangle strategy that are the best suitable amid prevailing lower IV condition of XAUUSD, hence, the strategy reads this way, shorting 1W (1%) OTM puts as well as 1W (1%) OTM calls for a net credit.

The strategy not only gives you the advantage of an anticipated volatility crush but also give us some room to be wrong because we may short premium narrowing strikes while in greed of collecting more credit than when IV is low.

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