FxWirePro: Bullion Market Edges Higher to Break 14-Months Highs - Hedge Gold Risks With Via 3 Way Straddles Versus Puts

FxWirePro: Bullion Market Edges Higher to Break 14-Months Highs - Hedge Gold Risks With Via 3 Way Straddles Versus Puts

29 April 2016, 17:17
Roberto Jacobs
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FxWirePro: Bullion Market Edges Higher to Break 14-Months Highs - Hedge Gold Risks With Via 3 Way Straddles Versus Puts

Gold spot is attempting to break 14 months highs at 1284 today, as a weaker U.S. dollar and indecisiveness caused by the BoJ’s recent acts to leave its monetary policy unchanged supported the precious metal.

On the Comex division of NYME, golf futures for June delivery were up 0.76% at $1,276.10.

The June contract ended Thursday's session 1.28% higher at $1,266.40 an ounce.

Futures were likely to find support at $1,238.50, Thursday’s low and resistance at $1,303.50.

Safe-haven demand strengthened after the BoJ chose on Thursday to hold its monetary policy, defying market expectations for additional monetary easing.

The implied volatility of 1W XAU/USD ATM contracts 18.6% and 16.35% for 1m tenors.

While, risk reversals are still signalling upside risks, considering above fundamental developments in bullion markets we think the opportunity lies in writing an OTM put while formulating below strategy for gold's fluctuation at this juncture.

Hedging Framework: 3-Way Options straddle versus Put Spread ratio: (Long 1: Long 1: Short 1) Rationale: Bidding short term risk reversals with writing 1W OTM put contracts,

As stated above bullion market remains safe-haven demand especially strengthened after the BoJ that keeps us eye on shorting such expensive puts 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 2M At the money delta put, Go long 4M at the money delta call and simultaneously, Short 1M (1%) out of the money put with positive theta.

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