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Gold Set to See Volatility Explosion, but Not Next Week


An options trade from OptionSmith.

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Gold spot price has been in a $50 range between $1280 and $1330 for the past seven weeks. It has become increasing narrow over the past three weeks, forming a triangle from which it should break out of, one way or another, sometime soon. Because of this narrowing range volatility, both real and implied has sunk down to the 12% level, the lowest in over five years.

I'm using the SPDR Gold Trust ETF (NYSEARCA:GLD) to establish a position getting long both puts and calls. I'm using a ratio diagonal calendar spread. What that means is: I'm selling a near-term, close-to-the-money straddle and buying a greater number of longer-dated, further out-of-the-money straddles. 


-- Sold to open 15 May $123 puts at $0.40 a contract
-- Sold to open 15 May $126 calls at $0.80 a contract


-- Bought to open 40 July $118 puts at $0.70 a contract
-- Bought to open 40 July $131 calls at $0.85 a contract

The May straddle is being sold for a $1.20 credit and expires on May 30 (next Friday). I'm buying the July straddle for a $1.55 credit.

The combination of the 2.6 ratio costs $4.85, or $4,400 for a 15 x 40 contract position. I'm willing to sell the near-term straddle for two reasons:

1) Things can persist for longer than expected; and

2) We're entering into a holiday week, which should keep volatility low and time decay in full effect.

The current Greek numbers on this position are:

The total delta is essentially neutral, but it's a positive 3.90 on both the put and call side. So on a sharp move up or down, the position will begin to profit.

Theta is +0.001, meaning we collect $10 a day in time decay, which should accelerate over the next 11 days as the near-term options approach expiration.

I have a downside target of $92 a share and an upside target of $144 a share. But, assuming these first options expire worthless, I will look to leg into other short-term premium sales to further reduce the cost.

Twitter: @steve13smith
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Position in GLD options.

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