FMX Connect Gold Options Report - August 15, 2011

Tyler Durden's picture

From FMX Connect

Gold Options Report - August 15, 2011

Market Recap:

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.

Directional Commentary:

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



Active Options

V 1600 P

Z 1700/2000 Fence

Z 1800/1900/2000 C. Butterfly


ATM Volatility Curve:


As of 3:00 P.M.


Volatility Smile:


***From NYMEX Settlement

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Ahmeexnal's picture

while my guitar gently weeps

vast-dom's picture

why is silver NOT $60/oz yet? 

Ahmeexnal's picture

don't rely on spot price.

silver is going for a lot more than spot nowadays.

try actually getting your hands on physical and you'll see.

lawrence1's picture

Exactly.  Buy while its still so slow. Im betting that Sprott is right, that silver is the trade of this second decale of the century.

Prometheus418's picture

I don't know about "a lot," but there is a premium to be sure..

My last ASE purchase was at $46.30 ea.  Bought a roll of walking liberties at the same time, and they came out to $42.67/oz, if you throw out the copper melt value (it's negligable anyhow.)

The thing about physical is that there are a lot of numismatic coins at the shops and on eBay, and they throw off quick assessments.  When it looks like ASEs are going for $90 each, they're almost always "proofs."  Some of the 90% coins are "rare dates."  The coin shop I use has been out of common ASEs for months and months, and all he has left are proofs.

Ampex has ASEs at $44.63 ea right now, without a volume discount.

I guess the point is that there is always a way to pay more, but the premiums over paper spot price aren't extreme just yet.  And despite rumors to the contrary, I have never had any problem just walking in and buying silver, or ordering online.  Those things may come, but they're not here just yet.

Idiot Savant's picture

Meh, on a percentage basis, premiums are the same today as they were when silver was $12.00. Seems like I paid roughly two dollars over spot at the time. 16.6% * 39.73 = $6.59 - roughly in line with today's premiums.

Sorry, but there's no shortages and premiums aren't out of line. Idiots paying huge premiums on Ebay is not a barometer of the silver market.

Prometheus418's picture

Isn't that what I said?

The worst I've seen is right after the margin hikes in May, when the local coin shop decided to price Peace dollars and Morgans at a flat rate, presumably to make sure they didn't get skinned.  Even then, they were $30 ea, and the guy had a whole box of the suckers.

Personally, I'm kind of glad it's trading in this range for a while.  $40/oz give or take a couple bucks feels about right as a place for the market to built support.  It's still affordable, but is high enough to seem like real money to most people.  Far better to get the price fixed in peoples' minds before it makes another run for it, so people stop worrying about it going back to $4/oz.

I'm not entirely convinced that there is ever going to be a shortage- 90% silver coins were transactional money for decades, and Gresham's law pulled them out of circulation and stacked them in closets.  There are a lot of silver coins out there in paint cans and tucked away in dusty boxes in the rafters of old houses, and I'd be glad to see them come back out and return to circulation.

I'm going to break with the "to the moon" theory- that may happen, but only in nominal dollars.  As far as transactions go, I can easily see those coins moving into circulation as the USD continues to deflate.  It'd be a hell of a way to starve the beast, too.  I don't think it's any kind of stretch to imagine silver coinage as daily transactional money, with a silver dollar having the equivilent purchasing power of $40 today, a half at $20, a quarter at $10, and SAEs at $50.  Almost all daily transactions, such as gasoline and groceries, could be handled with that structure, and the existing coinage could be used as small change.

That seems like a far more sensible proposition than imagining that a silver dollar will buy a town, though if it goes that way, I'll be happy to participate by, well, buying the town.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

One can still buy 40%. 90% and war nickels near spot and sometimes below spot at this time.


Thomas's picture

Healing the wounds inflicted by the five margin hikes. Takes a few weeks.

fuu's picture

You're still pushing that honeypot?

MFL8240's picture

Because you live in a courrpt country where they manipulate your ability to make money unless you want to buy the shit they spoon feed you.

Thomas's picture

...and then you will still fail to make money.

legal eagle's picture

Thanks for this post.  I would like to see this information more regularly!

kengland's picture

Where are you buying your metal? I'm paying 1.50 over spot

Got_Nukes's picture

Westminster mint about $1.10 over spot

FeralSerf's picture

Tulving is 29 cents over spot.

Sokhmate's picture

Looks like ~ 2 dollars less over spot that what i see on their site!!!

Whatta's picture

Wow. 680 million in gold options. He's a believer.

JW n FL's picture

the thing that is not on the news right now...

is that the family offices and Funds are ALL BUYING!

standing for delivery..

sooooo when that shit hits the main stream, WATCH OUT!!

Cdad's picture


You got to post that 180 degree whip around by Dick buying banks.  This after his "sell everything" call from about 8 days ago.

Ever the paid whore, Bove has done it again, helped to create the dislocation some client somewhere wanted...and is now trying to turn that ship from the long side.

How does a fuck like that even sleep?

Id fight Gandhi's picture

Just tune out the shills they talk shit.

I don't buy into the TA as much as fundamentals. I do pay attention to TA because robots and traders do, but fundamentals will always win out in the end.

What's the record for consecutive triple digit Dow closes? Was it broken today?

Everybodys All American's picture

Dick Bove before he dicks you.

topcallingtroll's picture

He enjoys fucking people over. It is just a fun game to him.

Tejano's picture

Gotta' love it. Blah, blah, blah and "If gold fails to break out of this range on the upside..." and blah, blah, blah complete with smiling multicolored charts. These guys remind me of ancient soothsayers poking around in sparrow entrails. We'll talk again in a year.

JohnG's picture

You're wrong.  FMX offers good analysis.  The vol smile is very important for forecasting.  Presenting as a surface over time is quite indicative of future direction.

FMX does good work.  I'd say you are new here, haven't checked yet.

Tejano's picture

"In the meantime, the volatility curve looks like a maimed seagull."

fmxconnect's picture

An unsmooth curve reflects different breakevens in volatility. Much like an unsmooth curve in bond term structure represents potential free money in cost of carry situations. The seagull was forfun. The math i will spare you. Butterfly arbitrages are based on these concepts. This would not be technical analysis, but options theory and term structure cost ofcarry arbitrage.



dumpster's picture

any one follow sinclairs advice on gold


When gold broke out above $524.90 I asked you to please cease trading as gold had moved from phase 1 into a runaway price phase

i'll bet dollars to donuts all this fancy trading has not given any one the returns of just this simple hold on gold

not to mention if a person who is so privy now as all the analysists .. where were they at 300 gold ... and 4.25 silver


just saying


JohnG's picture

Yeah, 24 weeks.  You should read and pay attention for another year before bashing excellent work.

fmxconnect's picture

muchas gracias. register for a basic account. Ill see ot it that you are upgraded premium 

Tejano's picture

"What we can decipher from this is..."

fmxconnect's picture

You must be a Doug KAss fan. We tore him a new asshole last month. 

topcallingtroll's picture

They could always be right for the wrong reason. These patterns are interesting, but mean reversal is more consistent. Even if the mean is dynamic.

Whatta's picture

Mildly bullish is a good thing. 100 runs in a week are fun, but lets keep it real.

apberusdisvet's picture

I'm still at a loss how technical analyses is at all meaningful in a market that has been so thoroughly rigged and manipulated.  Otherwise, a good article from a trader's point of view.

fmxconnect's picture

not my opinion, but valid nonetheless. "in a market where people are dishonest adn fundamentals are manipulated, the only theingthat is honest is technical analysis. it betrays the biases and weakensses of collective traders. it aint easy but it works." Technical analysis is the "tell" of the market.  Personally I tell our technicians it is voodoo witch doctor shit, but it serves a purpose. im an options stat guy.

topcallingtroll's picture

Great article by the way.

Always a great read.

Id fight Gandhi's picture

It means something, because it means something to someone. I swear the TA people can drive you nuts because the whole world could be burning but theyre too busy drawing lines and making out head and shoulders etc. To notice.

Everyones goal is to be on the right side of the trade.

The guys on cnbs are the worst. On down days they they ya it's all going down, here why. Then on up days they tell you it's all good. Even if you watched their shit everyday all day you'd still lose.

fellatio is not fattening's picture

On the 1700-2000 fence, I can visualize what you mean but can you be more specific as to which strikes, OR leave a link I can go to for myself.  Thanks much, BTW was thinking of buying Dec gold future and selling an $1850 call against and getting $40 in premium, thoughts.  I know it COULD go higher, but a 90 point gain in 70 days isn't bad

fmxconnect's picture

Dealers were buying 15 delta calls, like the Z 2000 strike, while simultaneously selling the 1700 puts a 40 delta option. These trades are commonly called collars in equities,fences risk or reversals in commodities. theproximity of the put to the ATM strike made this moreofa volatiliy sale than a simple collar. basically, the dealers aretakingthiergamma, which served tocovertheirasses because they areso ratio short calls to theupside, adn started t oroll them up /to their shorts. conclusion from this data point : We aint going anywhere, but if we do its higher. keep in mind that dealers are now a muc hsmallerportion ofa biggermarket, adn do not exert the influence they once did. 


regardin the 1850 call adn the 90 point gain. it is impossible to answer without your capital at risk, your risk tolerance or your other financial positions. alli can say is the Z 2000 calls have 40k in open interest, and if we get there it we be AFTERwe go thru the 1850 call. jsur make sure ti is money you can afford to lose. also have a plan on HOW you intend ot capture profits: hedging deltas, selling another call, sellign the 1850 out... etc etc.

vaya con dios

Flakmeister's picture

Good article, sort of explains why my GLD Jan 13 135 Sept 170 spread was closed for 34.80 last week... Hating closing it, was selling the 170s for the premium and gold ran faster than expected.... Damn, oh, well, time to reload

fellatio is not fattening's picture

Shit man, I an waiting for 5 gold futures to expire in ~12 days which I WROTE 1550 CALLS against when gold was ~1500, I got $16, today they are $220, made some money but left $100k ON THE TABLE and all I can do is wait, sure as fuck not going to close it out in any way/shape or form

Flakmeister's picture

Too bad, but you sold the calls for reason (like me).  I had reached maximum value, and now have cash and can buy any dip that may occur.

Cdad's picture


I see...I see.  You know, I think the real problem is the SEVENTEEN FUCKING LAYERS OF DERIVATIVES ON TOP OF EVERY LAST PART OF THE MARKET.  

We probably just need more bankers and hedge funds and options junkies, and everything would be great, and we'd all be drinking delta calls after the bell...while the fucking nation burns.

If the old adage is true, that you are either part of the solution or you are part of the problem, I suspect you are part of the problem, fmx.

To all you guys who long ago filled your lock box with gold and silver...hat tip.  As for this paper gold bullshit...just more hangers on and parasitic class fucks.

Paper gold is a short tomorrow.  All you saw today was a reprieve, brought to you by the intellectually stunted class of Chinese morons who ape shit bought the Euro again.  And I didn't even need two layers of derivatives to get there...or any "ti is money you can afford to lose."

Good grief [and by that I mean fuck all this building of NEW houses of paper the obvious wind that's a blowin'] 

fuu's picture

I wonder what markets would look like if they were not gambling dens.