Submitted by FMX Connect
April Gold settled at $1409.30 per troy ounce, a loss of $6.50 for the day. Volatility was offered today and risk reversals swung towards the puts.
M 1500 C
J 1400 C
V 1100/1200 1 x 2 PS
Q 1600/1800 1x2 CS
ATM Volatility Curve:
For the second day in a row there was strong two-way business in the front part of the term structure while the back part of the curve was alternatively ignored and sold. Funds continued to sell May options. Today they sold the 1500 C. Meanwhile the April 1400/1420 Strangle was purchased in size Over-the-Counter. In June the skew bubble surrounding the 1600 strike was squashed as speculators bought the 1500/1600 1x2 call spread. Bearish dealers bought the October 1100/12000 1x2 put spread and in general, sold back month straddles.
Options held up reasonably well in the fronts after yesterday’s post-close washout. Dealers came back buying puts in December and selling calls. Some speculators recommitted to the market by rolling their longs from April to June. This market is definitely a call skew market now with volatility firming in rallies and dropping in selloffs. What has changed and we see this in other markets as well, is the increase in fat fails (leptokurtosis); it seems that insurance must be bought at any price. In markets where the 20 delta call or put used to be king now it’s the 5 delta call or put that matters most. In gold it’s both: dealers continue to lean into the wings by buying 1x2 and 1x3 call spreads but the appetite for tails is insatiable. We don’t think this is temporary, the world is no longer pricing statistical probabilities, it is chasing after black swans. All markets seem correlated but at some point the risk-reward just isn’t there. Just because a wing call trades at 30% volatility does not increase the probability it will go into the money; it’s just a reflection of unquantifiable fear.
Editorial comment: It’s becoming increasingly annoying watching dealers buy call and sell puts the day before we rally $20, and then the next day buy put and sell call the day before we drop $20. Yesterday’s sell off from the 1415 area seemed almost orchestrated. At the very least, the futures selling came in during the thinnest trading hours. While exchanges herald the benefits of electronic trading there is one thing wrong with it. Electronic trading minimizes the information leakage associated with using brokers, for sure, but it is also allows oligarchic organizations to anonymously manage price movement while hiding behind digital displays. We won’t use the word manipulate, in part because of our libertarian bent, but it’s getting ridiculous. Where there used to be 50 5-lot thieves on the floor now there are 5 Too-Big-To-Fail banks with infinite fed-sponsored balance sheets doing whatever they please. The idiot locals on the floor, fragmented as they were, served to keep the big banks in check because there was transparency of price and to a large extent, the players were known. This doesn’t exist anymore and we don’t see an end to it. Instead of thinning the forest for the trees, technology, regulatory and economic factors have killed the saplings and destroyed market diversity. This translates to a narrow and deep liquidity pool in trading venues; god forbid if one of them fails.