FxWirePro: ITM Delta Calls For Dubious Bulls In Bullion Markets For Optimized Hedging

Gold’s 18% YTD appreciation despite US dollar strength looks eerily reminiscent of the dying days of previous expansions.

Despite the recent rally, we do not yet think a recession is fully discounted in the gold price and we could now foresee gold prices peaking at around $1,780/oz by year-end 2020 and averaging $1,418/oz in 2019 and $1,724/oz in 2020.

At the same time, we do not view the current bullish setup for gold as the onset of another decades-long Golden Era, as was experienced in the first decade of this century. 

OTC Updates, Trading and Hedging Strategy:

Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks. One could see the bullish risk reversal setup. To substantiate the above-mentioned dubious bullish sentiment, risk reversal (RRs) numbers indicate overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in future.

Options Strategy: Capitalizing on any abrupt dips in the gold price in the short-run and OTC indications, bullish neutral risk reversals of gold, we advocate longs in gold via ITM call options as they look to be the best suitable at this juncture.

Buy 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If expiry is not near, delta movement wouldn’t be 1-point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying. Courtesy: Sentrix, JPM, and Saxobank