From FMX Connect
Gold Options Report - August 15, 2011
The S&P 500 extended its rally on Monday, closing at 1204.49 for a gain of 2.18% on the day. The dollar index was down sharply (73.872, -.985%) on lackluster manufacturing data while German Chancellor Angela Merkel’s and French president Nicolas Sarkozy’s scheduled meeting for tomorrow strengthened the euro. Gold and treasury bonds were the safe-haven assets of choice, with investors’ enthusiasm for currencies like the Swiss franc and Japanese yen dampening on the threat of intervention.
Gold traded lower overnight but trended upward the rest of the day. The knee-jerk reaction to last week’s margin hike is over, and speculators are beginning to feel more comfortable buying again. The options term structure is haphazard, with calendar relationships mispriced up and down the curve. October and February trade in line with what could potentially be an emergent contango curve, yet December and its serial brethren trade above that. We can only guess why this hasn’t been slammed yet; probably too many people are preoccupied not making money or taking lower-lying fruit to not take advantage of these trades. The GLD market-makers are back-to-backing same expiration across different assets. Comex locals are trying to lock in profits to make margin calls. The dealers are hoping their gamma covers their short call positions and longs are hitting bids trying to lock in profits. In the meantime, the volatility curve looks like a maimed seagull. What we can decipher from this is if the market settles down we think a contango curve will resume itself with October as the low point, December coming in line and the curve sloping upward through December 2012. If the market spikes higher we think October will lag December in performance. October is in liquidation mode now. September is not even worth mentioning.
The trading today was consistent with the last three days, with one exception: Dealers bought calls. Dealers bought them in fence form, but they were careful to sell volatility in premium while covering their short calls. Examples include the 1700/2000 Risk Reversal and other structures of that type that sold premium yet bought skew. Remember the December 2000 Call is a 15 delta item now, hardly a typical skew option, yet it has premium of over $22. Volatility is by no means cheap. Simultaneously, it is by no means unjustified.
Options: Up until today, between the call liquidation and the straddle selling we would have said the market was poised for a quick sell-off or a slow move higher. Today’s risk reversal trading by dealers makes us lean toward the latter, and at a slightly faster pace. Our technical analysis below highlights levels to watch. Options just don’t show us washing out right now. Perhaps another two or three margin raises will do the trick. Conclusion: Mildly Bullish
Technical: Gold shrugged off the two-day engulfing pattern from Friday, settling up $15 on the day and trading higher through the close. For all intents and purposes gold remains in a range and is looking for a settlement below 1720 or above 1785 to initiate the next leg. Interestingly, bullion did not test breakout area we previously described, suggesting that there may be strong buying interest in the 1730 area (our other indicators support this assertion). If gold fails to break out of this range on the upside it should test 1720. A move through 1720 or 1685 should prompt moves to the 1685 and 1825 strikes respectively. Long-term this market remains bullish, but short-term we think there is more potential to the downside (especially if the CME is ready to hike margins again). Conclusion: Sideways to Bearish
V 1600 P
Z 1700/2000 Fence
Z 1800/1900/2000 C. Butterfly
ATM Volatility Curve:
As of 3:00 P.M.
***From NYMEX Settlement