FxWirePro: Trace-Out Opportunities In Short Vega And Gamma Longs - Delta-Hedged Strangle Versus Straddle In Gold

For XAU/USD, the filtering tool managed to cut by 50% the 50% drawdown experienced (refer 1st chart) by the strategy as spot dropped by 12% and short-dated vol quadrupled in just a few weeks, as market bottomed around the 20th of March. The filtering analysis would recommend re-entering short- Gamma trades at the moment, but the intensity of the signal is still very weak. A possible takeaway from the filter analysis would be that of waiting until market conditions / price action stabilize further before considering playing for a tightening of front-dated vol, which remains 14 vol points higher than early February levels.

Harvesting the residual risk premium in back tenor wings: Selling convexity in vega tenors of gold vol curve has been historically one of the highest Sharpe ratio type of gold vol surface trades (refer 2nd chart). During the last year summer vol episode the delta hedged 9M straddle vs 25D strangle returns dropped by 3vol pts only to pare back all of the loses in September as the sentiment rebounded. Exceeding the last year drawdown, the COVID-19 March vol episode caused 6pts drop in P/L before paring 1/3ed of that drop over last two weeks. However, with the Great Lockdown showing signs of easing and our Gamma indicator suggesting a turn for better for good selling extra risk premium still embedded in the wings and capturing the residual P/L from the ongoing normalization in back tenors looks as an appealing proposition. 

Consider: Short 25D strangle vs long 9M straddle, delta hedged, @1/1.5 indicative. Courtesy: JPM