Gold A Safe Haven No More? – GLD Options Trading Strategy

by Philip on June 5, 2012

in Trading

Trading in Gold related instruments has been active during the most recent market downturn but not as active as one would expect and definitely not in the direction one would expect with equities collapsing. As of yesterday’s close the S&P500 is down 9% since May 1 primarily on European concerns and less than encouraging US economic numbers. Gold has not been immune to the recent downturn, falling over 6% at one point before rallying on Friday to now register a 2.5% decline over the same time frame, not exactly the definition of a safe haven. However some volatility indicators and recent trading are starting to suggest that this may be a good time to return to Gold.

  •  GLD Volatility Elevated: From a strict volatility perspective, Gold (as represented by the GLD SPDR Gold Trust ETF), along with the market at large, has risen to year highs over the last month with 3-month at-the-money implied vol closing yesterday at 23.5%. On an implied-realized basis GLD 3-month implied volatility currently exceeds 3-month GLD realized volatility by nearly 5 vol points, the largest spread seen in the name in over 8 months.
  • GLD Skew Indications: Skew, which we define as the difference between 25-delta put implied volatility and 25-delta call implied volatility, is pointing towards upward movement in the GLD. Where most equity put options have downside implied volatility trading at levels significantly higher than upside call implied volatility, reflecting greater risk to downside moves, oftentimes commodity-based options skew has upside call option implied volatility trading above downside put option implied volatility, suggesting more risk to upside movement. What’s most interesting is the fact that implied volatility in downside GLD puts has traded above that of the upside calls for most of May (similar to equity skew) but over the last few sessions we’ve seen that relationship return to somewhat “normal”, with upside call implied volatility trading above that of the puts (see chart below):

GLD Skew

  • Recent GLD Options Trading: Long call spreads have been the options trade of choice over the last few trading sessions as investors looked to implement a bullish bias with limited volatility exposure. Some of the more recent flow included investors purchasing 15k July $157-$172 call spreads as well as buyers of 19k Sep $165-$175 call spreads.
  • Important GLD Levels: We identified ~$144 and ~$174 as important support and resistance levels in the GLD. While we very well could see downward pressure in the GLD down to the $144 level, investors looking to get long gold exposure over the coming months should consider purchasing Sep $157-$174 call spreads. Using yesterday’s closing prices, the Sep call spread could be purchased for $5.40. Maximum profit would be generated with shares of the GLD trading at or above $174 (up 11% from current levels) upon September expiration. Maximum loss on the trade would be limited to the premium paid at inception ($5.40).

Gold eases, focus shifting to key economic events

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