Since we’ve advocated the 3-way straddle versus put on gold’s hedging, this is just to follow up to our previous write up.

The implied volatility of 1W XAU/USD ATM contracts 17% but 23.52% and a tad above 20% for 2w and 1M tenors respectively, cheers..! Good news for writers.

The skew appears considerable for long side compared to the volatility, strongly suggesting spread with OTM strikes-like structures, conducive for writers.

Please be informed that the highest theta numbers on ITM put strikes, thereby, the writer of option most unlikely to be obligated for option exercise if underlying spot gold keeps spiking on expiry.

For ITM and OTM options as the time to expiry draws nearer, Theta lowers and decreases. The above sensitivity table is an instance as to how Theta responds when the option is ITM, ATM, and OTM, and as time passes. You can also observe the dramatic impact of time decay (Theta) for an ATM option approaching expiry.

Theta of USD75.26 on ATM strikes would mean that as underlying spot gold travels through OTM or even remain stagnantly then the premium received would keep on shrinking (in other words the option value would deteriorate) contemplating time decay factor.

The execution was this way,

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

Rationale: Eying on favorable theta shifts considering lower skew and shorting expensive calls with shorter expiries. As a result, we capitalize on beneficial instruments to reduce hedging cost.

Go long in XAU/USD 2M At the money delta put, Go long 4M at the money delta call and simultaneously, Short 2W (1%) out of the money put with positive theta.