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Gold Set to See Volatility Explosion, but Not Next Week
An options trade from OptionSmith.
Steve Smith    

For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.

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. 

Specifically:

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

And:

-- 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.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Gold Set to See Volatility Explosion, but Not Next Week
An options trade from OptionSmith.
Steve Smith    

For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.

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. 

Specifically:

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

And:

-- 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
< Previous
  • 1
Next >
Position in GLD options.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Gold Set to See Volatility Explosion, but Not Next Week
An options trade from OptionSmith.
Steve Smith    

For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.

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. 

Specifically:

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

And:

-- 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
< Previous
  • 1
Next >
Position in GLD options.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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