Whither Gold?

Although gold option volatility has settled into what looks like a base of around 20%, it is still usefully above realized vols at around 15-16%... useful depending which side of the trade your on and presuming realized vols don't startle us all into a dither.

Aside from what has become the normal 4 or 5 points premium, there doesn't seem to be a lot of buying interest in gold options (specifically calls), despite the gold-bug's scaremongering and ramping.

Price action on the other hand looks to be approaching an interesting point at the old resistance becomes support observation and this is still in a technical uptrend. Countering this is a few voices such as Roubini who have been talking Gold down.

I've exited my option trades now, so nervously contemplating my next move. I don't want to miss a good party thrown by the gold bugs, but on the other hand, I can't help feeling a bit skeptical about $5,000 gold or whatever number get pulled out of people ass.

Short gamma doesn't excite me right now.

So, whither gold?

Gold Volatility 14 Oct '09

Gold volatility went into the tank today and with gold not far off those all time highs one has to wonder why. Below is the Chart of GLD with CBOE's $GVZ (The gold VIX).

The $GVZ plonked to 20 and a bit and while that is still a fair way above 30 day historical volatility at 16%, it represents a fall to close to the "normal" premium of IV over HV in gold options.

You'd have to suspect at least a pause/retracement from here if that means anything at all. Perhaps the talk is some quarters of a bottom in the dollar is easing concerns, though the dollar is still taking it where it hurts.

Countering that is the seasonal tendency in gold which resumes an upward bias right up to Christmas (depending whose dodgy data you use).

I'm still bullish after some sort of pull back. Markets just want to go up right now, but option traders seem skeptical.

Gold Volatility 8 Oct '09

OK, so I have a thing about Gold at the moment. There is nothing unusual about that as half the universe has a thing about it at the moment. With gold grinding out new all time highs every day, there is nothing to be surprised about.

For me it is more about finding option opportunities, hence the prelection with gold option IVs.

I had an idea that with new highs in the underlying, we'd see new highs in implied vols as punters bought calls with their ears pinned back. This is not how it's playing out at this stage. This IV peak is lower than the IV peak in early September, even though the "actual" volatility of this move is slightly greater than the early September one. So, what this tell us?

Probably nothing.

But if any delusions can be derived from this, it is that option traders are toning down their expectations of more upside in gold. It should be noted that implied is still miles higher than realized with 20 day HV at about 17.5%, but this seem to be a chronic situation. IVs have consistently been higher than realized for quite some time.

The standard wisdom says that either IV drops or realized increases. It ain't necessarily so with gold.

No ideas for a trade *right now* but a few ideas depending on how things pan out

Gold Volatility Popping Again

As we all know gold is breaching all time highs right now and leading on from my post yesterday http://www.internationalstockforums.com/index.php/topic,4.0.html there is some interesting developments from an option trader's point of view in that implied volatility (vis a vis option premium) is spiking well above current realized volatility.

Here is the last three months of volatility history on GLD (Gold SPDR)

As is obvious, implied volatilities are well over the odds. As you would expect, most of the meat is in the higher strikes as shown by this skew graph:

This means call option buyers, particularly OTM call option buyers need further dramatic rises to turn a profit, whereas on the face of it, writers would have an edge here. That's on the face of it. Who you be game to write call options here? Not this little black duck; not yet. I've got some naked put shorts I wrote at the end of august in anticipation of the seasonal gold bull, plus trading the moves with various strategies, but would I write more puts here?

Well I prefer to write puts at potential pivot point lows and that ain't here. (With the caveat that it has to make statistical sense to do so)

This situation is still developing from my point of view and worth watching for a nice writing opportunity. The $64,000 question is whether realized volatility catches up with implied, or whether gold bugs are just having another "Gold to $5,000 oz" party, are wrong again and IVs collapse back to current reality. We would need some very strong moves, relatively, to justify this IV.

Stay tuned.

Coughing Up For Gold Options

The recurring theme in stock index options over the last few months has been the chronic overvaluation as measured by implied volatility over the eventual realized volatility. Theoretically, this has been an excellent time for index option writers, except that the indexes have been running a long way from their mean. Any sellers writing fairly close to the money (like moi :-0) have been as busy as a one armed taxi driver with crabs, making adjustments.

We've had to work pretty hard for our money.

Index options haven't been the only ones in more or less chronic overvaluation. Gold options have been in a similar situation. I like the futures and their options, but the gold ETF, GLD and its options pretty much mirror the futs.

Check out the IV/HV chart for the last six months.

Even ignoring the IV spike earlier this month, those buying options have been paying well over the odds. Writing options here seems the no brainer. I liked the idea of selling premium with some long delta with a couple of different ideas leading into September, due to the pretty reliable seasonal tendency. That's worked out pretty well, but who's game to write unhedged on the call side in this market?

Not this little black duck!

Runaway gold markets don't happen that often, but the bulls can go berserk if *something* happens. Nevertheless, there is a bit of short gamma fun to be had here in this market... just cap the risk IMO.

Futures Options - Part 3

Judging by my site stats since starting on futures options, it doesn't seem like there is a lot of interest in them. That's a bit of a shame in my opinion, because there are some great opportunities to trade in the futures/commodities markets.

While there is nothing at all wrong with stock options and I will continue to trade them, commodity options can be far more suitable for some investors/traders, particularly if you like writing options.

The seasonal tendencies in commodity markets offer some unique opportunities, not just for speculating on direction via direct futures and/or long options and option spreads, but I think the most reliably profitable trades are the so-called "non-seasonal" option write as described in Stuart Johnston's "Trading Options to Win".

This is basically writing options on the opposite side of a seasonal tendency, or even just a seasonal non-tendency. This is a trade that has history and statistics on it's side and with discipline, is an excellent way to trade.

One of these to follow in the near future that I have alludes to already on the blog, is the seasonal bull in gold which begins around the 9th of Sept and continues to the first week in October.

I'll wrap up this "difference between stock and futures options" theme with a couple more points and then it's DYOR.

Tick Size

Each commodity future has its own minimum tick size that will relates to the price per bushel/tonne/bale/whatever and they are all different. As an example, the grain complex is quotes in cents per bushel (contract size is 5,000 bushels) with a minimum tick size of 1/4 of a cent. This means each cent movement on a contact of , say corn, is worth $50.00, while the minimum tick size is $12.50.

One would think the options would be quoted the same way. Nope. Grain options have a minimum tick size of 1/8 of a cent, not 1/4 cent. No big deal, but something to be aware of and something to research at the relevant exchange's site before trading them.

Margin

If you like writing options, you can leave Reg T behind with futures option. Futures options margins are calculated using a ludicrously complex algorithm called SPAN, which is short for

Standard Portfolio ANalysis of Risk and better known to stock option traders as portfolio margin.

As a general guide, short option premiums on ATM or OTM options will generally be less than their corresponding futures margins, which is quite generous.

There's enough there for folks to be aware that there are significant differences between stock and futures options and my best advice is to aways refer to the exchanges website to be sure of contract specs and expiry.

Gold Doldrums

A few days ago I highlighted the rising implied volatility of gold options. That seems to have been the high for gold IV for now, as IVs have settled back to the high teens.

Nothing more than a short term IV spike which has been fairly typical.

Meanwhile, realized volatility remains low, much lower than IV but as discussed before, there are good reasons for this.

Gold seems to be rooted in the doldrums, but there is always that September seasonal tendency to look out for and then there is the inflation hedge argument... QE and all that.

My purely baseless guess is that gold dribbles along for a while; until it doesn't.

Gold Volatility Popping

Gold volatilities, along with vols in just about everything have been in a steady tankage since the near Apocalypse in the latter part of 2008.

The following image is of 63 day, 20 day and 6 day historical volatilitities on GLD the gold ETF; the varying lookback periods serve as a look at the structural volatility of gold. The general level of HVs have come from ~50-60% down to sub 20%, effectively reducing by two thirds. It does look like HVs are bottoming out however.

This level of HV is not unusual, having visited these levels twice before since the inception of this ETF in late 2004, the observation at those points was that vols stayed pretty low for months before eventually popping.

So does this mean gold stays quiet for a few months? Maybe not. Two things to note going forward.

1/ The seasonal tendency of gold shows that September is traditionally when gold starts flying, because of jewellery demand at this time of year,apparantly. This chart from www.spectrumcommodities.com

Important thing about seasonals; it's a historical *tendency*. It doesn't mean gold WILL run higher during September.

2/ Implied volatilities are popping, with IV a full ~50% higher than the 30 day HV plotted on the following graph.

So are option traders anticipating an increase in realized volatility? Well, IVs have consistently overestimated realized volatility; there's good reason for this with the ever present chance of Gold bugs going ape shit over one or another threat to world stability.

But an IV pop is what it is, it doesn't necessarily protend anything, as we can see from recent history, but reason to sit up and take notice. Perhaps the pop in the underlying a couple of days ago is responsible, perhaps gold bugs are about to party... again.

I think it's interesting juncture. I don't have a position in gold at the moment, but this looks an interesting time to watch more closely.

What Are Gold & Oil Telling Us...

...if anything?

Well yeah, it's partly to do with the dollar doomage, but I think there is more to it than that. Both gold and oil are threatening, or threatening to threaten multi year highs. In the case of oil, all time highs.

First gold: There is the gold is money argument, so it's natural that gold will rise as the dollar tanks. I don't go along with that 100% but what I think matters nought. If enough folks with enough capital think so, it is so. Perception is reality. Add to that the speculative froth once the public gets onto the bandwagon and in the current environment we could see some real boomage here. To a certain extent, I think this could be starting to happen. The gold bugs are certainly starting to froth at the mouth on all the trading forums.

weekly continuous gold

In recent months it's been grinding sideways frustrating the crap out of all but option writers, but this move is starting to look fair dinkum.

On the the other hand, oil is threatening to take out its all time high. There are probably plenty of bullshit fundamentals to justify this, and if of an apocalyptic bent, one simply must be a crude oil bull.

weekly continuous west texas sweet crude

The $64,000,000 question is the future of the price of oil in the medium term, presuming the world economy goes into recession. It would be expected that a recession would lessen oil consumption and result in declining prices, sans any killer 'canes obliterating the Gulf of Mexico or similar.

Long term, you just have to be a bull.

I'm glad I have some rudimentary charting skills because the fundamentals are often too full of biases, bullshit, short term considerations and rigs getting blown over.

An all time high in pretty short shrift seems like a high probability in the near term.

Back to the question posed at the beginning. Is this trying to tell us something? Something other than the purely native fundamentals of these two commodities? If it is, I suppose it will be loud and clear in a relatively short space of time.

So WTF Exactly, is Going On?

Is the Gold upage a harbinger of more uncertain times? What the fuck is going on? B-52s flying around with nukes by "mistake", Russian bomber fleets flying with Jet fighters in puruit?

Holy Crap!!

US B-52 in nuclear cargo blunder

The US Air Force has launched an investigation after a B-52 bomber flew across the US last week mistakenly loaded with nuclear-armed missiles.

It follows reports in the Army Times that five missiles were unaccounted for during the three-hour flight from North Dakota to Louisiana. FULL STORY.

... and then:

U.K., Norway Send Jets to Intercept Russian Aircraft (Update2)

By Robin Stringer and Sebastian Alison

Sept. 6 (Bloomberg) -- Four U.K. Royal Air Force Tornado jets were launched to intercept eight Russian strategic bombers, the British Ministry of Defence said. Two aircraft from the Norwegian air force also trailed Russia's planes.

The RAF Tornado F3 jet fighters were scrambled early today to intercept the Soviet-era Russian bombers ``which had not entered U.K. airspace,'' the ministry said in an e-mailed statement. The ministry didn't elaborate on how close the RAF aircraft got to the Russian planes. FULL STORY

This is a rather apocalyptic development and could explain gold why gold is getting of its arse and doing something. Renewed Cold war tensions anyone?

Still some ways to go before gold looks like a new trend, but it's been worth paying attention over the last few days.

Eyes wide open for a couple of reasons here.

Gold Heads Up

Good old gold! It never ceases to raise the pulses of those enamoured with the yellow metal and trading forums across the globe are abuzz with gold's move today.

One would think that I would be a gold bug, what being of an apocalyptic bent; and sure I have a few obligatory Krugerands etc. It's one of the futures contracts I trade too... why not?

To me it's just another commodity and it's loose inverse relationship to the dollar can be seen in several commodities, but a hedge against a financial apocalypse? Maybe. For sure gold will soar (in dollar terms) if the grenade the financial system has in its hand blows up in its face, but so will other commodities such as silver, copper, oil... maybe even ags and softs. And you can bet your arse I'll being buying with ears pinned back if that happens.

In the above chart, which has the US dollar index plotted also, you can see the loose inverse correlation. But it is very loose. To me it's not a good hedge for the dollar, really. So I trade it purely on chart action, with a lazy ear on the bullshit fundamentals.

Chart wise, today's move is interesting in that it takes us up to supply line and so waiting to see if it breaks out, but hell's bells, nothing to really have an orgasm over. Certainly if this was a stock chart, it would be mildly of technical interest and in this context it is hardly worth going agog over.

But the thing with gold is that by the time it is really interesting, it good be too late, so building a bit of a position in here makes some sense.

But I'll leave all the salivating to later... possibly

A Look At Metals Volatilities

Implied volatilities in the metals I trade (gold, silver & copper) are at the moment, at somewhat of a low. If we go by the traditional option dogma of buying options when vols are low, then on face value, metals options are a buy.

But are they. In my experience, it is not as straight forward as that. Well if you have a clear directional view of an imminent move, then sure, buy a call or a put, or the directional spread of your choice.

The first thing about low volatilities, is that they can stay low for a LONG time, or even go lower. This is generally not a good thing if you are long options. An option trade is also a volatility bet to a greater or lesser degree, depending on the strategy. When we buy options, we are long "vega" which means we preferably want volatility to increase, or at least we want the underlying to start trending. If not, we get chopped to pieces by theta (time decay). If volatility decreases, we lose again.

Lets have a look at the volatility picture of Gold (Copper is quite similar):

IVs are basically a third of what they were a year ago and as yo can see they have been even lower. If the unceasingly bullish Gold Bugs are correct, gold will skyrocket as this credit bubble unravels. Not only will gold fly, but gold IVs will also go berserk. Equally though, I have read credible articles that say go will go the same way as housing, into the pits. Who knows?

The big question is if gold makes a big move, when will it be? Well I have no freakin' idea, but let me show you Silver IVs over th last 2 years:

A similar picture to gold, but with an interesting lift in IV on the back of last weeks dumpage.

Whether this means anything or represents an opportunity, I am pleading the 5th, but I say it's interesting enough for a post on my blog and something to definitely follow.

Stay tuned.

Is Gold Real Money, Or Just Another Bloody Commodity?

I've often pondered this question myself. From my own observations as an inveterate chart watcher, sometimes it behaves like money and sometimes like a commodity. A conundrum.

For some clarification on this Mick Shedlock has written a great article on this topic, check it out:

Misconceptions about Gold

The obligatory chart shows the August contract caught in this downward sloping channel with little swing trades possible of the declining support and resistance. In the absence of any meaningful trend in the bigger picture, this is my preferred way of playing Gold at the moment.