Gold spot is attempting to break crucial supports, now on the verge of breaking 1240 levels, gold futures for June delivery on the Comex division of the NYME fell to a session low of $1,242.59 a troy ounce before recovering slightly to trade at $1,247.05 by 12:50GMT.

Gold prices plummeted from the highs of 1303.62 to close at 1248.77, or 4.20%.

The current implied volatility of XAU/USD ATM contracts are at 14.42%, and it is likely to spike higher at 16% and above for 1W tenors.

The premiums of 1W ATM contracts are trading at 29.96% more than NPV, hence, contemplating this disparity with risk reversal we think the opportunity lies in writing a call while formulating below strategy for gold's uncertainty at this juncture.

On flip side, Fed hikes before 2017 is also very much on cards. The underlying spot gold price is sensitive to moves in U.S. rates, as a rise would lift the opportunity cost of holding non-yielding assets such as bullion.

Hedging Framework:

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

Rationale: ATM premiums are trading 29.96% more than NPV, while implied volatility of these ATM 1W contracts are at 14.75%, hence there exists a considerable disparity between premiums and vols that keeps us eye on shorting such expensive calls 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 (1.5%) out of the money call with positive theta.