FxWirePro: XAU/USD vega spread for HY vols, delta risk reversal indicates costlier downside hedging

We have obtained a position that would gain value for an increase in underlying price from 1089.15 levels to 1168 levels (this week's top 1170), but for now delta risk reversal is shifted into red zone again with increased volatility. Gold was fallen to a 5.5 years low of $1,073.53 on 20th July amid the Fed's speculation of rising interest rates in September for the first time since 2006. Since then we already reiterated the prices to have rebound approximately 3%.

As the bull put spread is a long position and a net credit strategy (you sell options premium), Vega is negative when the position is profitable and positive when the position is unprofitable. It means that an increase in implied volatility is harmful to your position when it is OTM and conducive when the position is ITM. Vega is greatest for options far from expiration and becomes less important while options approach expiration. As a result, the effect of implied volatility on the bull put spread, which is a strategy to trade on a short-term basis, becomes minimal.

After this short term price recoveries, delta risk reversal as shown in the nutshell suggests downside hedging has been relatively expensive and daily technical chart makes us to have quite dubious eyes on prevailing bull run as there is now bearish signal generated by weekly RSI and slow stochastic, while stochastic has approached overbought trajectory and attempting for %D crossover.

Gold prices have been consistently rising to hold near a three-week high as China's surprise move to devalue its currency fanned optimism that the Federal Reserve could delay raising interest rates until the very end of 2015. Further the positions constructed for bull overview will increase in value with time decay. It is wise to build option strategies for hedging while considering delta neutral and gamma neutral and relatively high sensitivity to standard deviation, but always have this in mind that the HY vols can be traded vega spreads on a speculation grounds.