Is Gold Back "In Play" - An Update From FMX Connect

From FMX Connect

Summary

June Gold settled at $1495.80 per troy ounce, a gain of $15.80 for the day.  Calls were bid on the back of an overnight rally and a size buyer of the December 1600 Call.

Options Commentary:

The market was called to open $13 higher today, entering back into the meat of the trading range for the last two weeks. One would think that this retracement of a down move would be accompanied by a retracement of the volatility but we’ve come to learn from this market that skew and its implications are more volatile than volatility itself. Volatility should have been lower today. Calls should have been slammed today. Having attained break-even for the day, one wouldn’t expect back-month options to be of interest when the gamma lies with the shorter-dated months. If you thought any of those things you would be wrong. Here’s what happened: The market opened at 1493 and a buyer of the June 1500 Call came in, purchasing approximately 1000 lots. The market absorbed the balance as there is plenty of two-way business at the strike. Subsequently, a buyer surfaced in the December 1600 Call. The MO of the buyer was very similar to the MO of the August 1600 Call buyer we saw two months ago. As a quick review, between 10,000 and 15,000 August 1600 Calls were bought over the course of roughly a week and afterwards the market went to 1570. Today, 4,000 of the December 1600 Calls traded and it was this option that single-handedly changed the term structure of volatility. By the end of the day the front months were down, the back months were up and October served as the fulcrum (see chart below).

Who is this buyer? We don’t know. Its most likely a fund or a dealing bank executing an order for a fund. We can’t tell you the market is definitely going to go higher from here but we can tell you that if it does volatility will firm up.

Directional Analysis

Directional analysis via options can be summed up very briefly. The options say don’t be short the market.

Technical analysis: We ventured back into the range we discussed before. We’re fairly neutral between here and 1520. We’d be tempted to get long above 1500 because of the psychological significance. There is nothing technically that bolsters the options case except maybe that yesterday’s sell-off stopped just above the 50-day Moving Average. It’s possible the downside momentum is closed off; we just don’t see the upside yet.

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Active Options

M 1500 C

V 1500 Straddle

Z 1600 C

 

ATM Volatility Curve:

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As of 4:00 P.M.

 

Volatility Smile:

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***From NYMEX Settlement

End of Day Straddles

GC      
  Future Bid Offer
M11 1495 25 29
N11 1495 60 64
Q11 1495 82 86
V11 1500 124 128
Z11 1500 160 164
G12 1500 193 197
J12 1500 220 224
M12 1505 246 250

As of 4:00 P.M.