Gold And Greeks: Some Perspectives On How To Trade The Next Move

From Damien Cleusix

Once more our strategy to buy gold implied volatility when it fell below 16 has worked as expected (and as it has in the past few years since we have started recommending it).

We buy the volatility to hedge our long position. What is interesting, and one of the big reason we have been doing this in the past and insisted on the concept in our quarterly reports and updates is that the implied volatility of gold has a strong tendency to rise before gold starts to decline. The steeper the rise of gold the steeper the rise in implied volatility. A hedge which rises with the price of the asset you want to hedge is a dream.

Gold implied volatility then tends to fall with the price of gold if the correction is swallow but then rise again if the correction is very large (see graph below).

So what to do now?

We maintain the forecast we made in 2002 that gold will rise to >$3,000 (and we believe it could be by a wide margin as it is expected to become (it is not yet) a bubble).

For the short-medium-term, B. Bernanke speech tomorrow could (we insist on could as we would not be surprised if it is a non-event) be strongly bullish for gold but on the other hand with Paulson funds loosing almost 40% Ytd in some of his funds and the future exchanges around the world hiking margin on gold and silver, we could see further liquidation in the near-term. Liquidation risk is also restraining us from recommending to buy all the gold producers stocks you can at the present time (but we will do it probably this autumn as our gold stock models are on strong buy modes with historic >100% 6 months return).

A return to 1500-1550 is a distinct possibility

While in the short-term we could see a short-term rebound to 1800 but we would not bet heavily on it. A move below 1720 would pave the way to the 1550 level.

What would we do?

We would sell part of the implied volatility hedge in place (at least 50%) and then we would (using GLD as the basis) risk buy September 160 puts and sell  September 150 puts.  We would also sell September 180 calls and buy September 192 calls.

You will find below the relative quantity using a 100 GLD shares as the basis. Not that we recommend buying 2* more 165 puts


The greeks of the porfolio will have to be dynamically managed.


No comments yet! Be the first to add yours.