Short term
/
Buy
Trade view / 25 August 2017 at 11:13 GMT

How to play a minor retracement in gold — #SaxoStrats

Product Manager, Options Trader, Educator
Denmark
Instrument: GLD:arcx
Price target: 120.50
Market price: 122.29

SaxoStrats
 
Background

Gold prices have moved almost $100 over the last six weeks from their July 10 low of $1,204/oz to the recent intraday high of $1,306/oz. The pickup has been aided by "high noon"-style political rhetoric between the White House and North Korea. 

Additionally, the weakening of the greenback has also positively impacted the yellow metal. 

GLD

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 

While we are not attempting to pick a top here, we can't help but notice the following three triggers: 

  1. The established range over the last four months
  2. Low implied volatility
  3. The Jackson Hole summit, which could give a little boost to the USD and see gold lower

With this in mind, let's take a look at the gold-tracking exchange-traded fund GLD and how a long put butterfly spread could help you hedge a long position in the underlying or simply express a slightly bearish market view.

First, a word about volatility. As the underlying price has made this bullish run, the realised or the historical volatility has fallen. The upward move, however, has made deeper out-of-the-money calls more expensive relative to out-of-the-money puts. 

Investors could take advantage of the existing skew in various ways, for example by selling calls to finance the purchase of puts, creating a put spread, or (as in our case) buying a put butterfly. 

put/call skew
Source: Quikstrike

Here's the spread's P/L graph for the weekly GLD options. 

Buttefly
Source: Dynamic Trend

The long put butterfly could benefit from the following factors: price of underlying falling 1% or more from current levels (delta), increase in volatility (vega), and little bit from the time decay (theta). If the price holds here or rises, we will lose our premium.

Management and risk description

  • The strategy has a defined risk 
  • The options are American-style expiring on September 1
  • No commission fees included

To learn more about the strategy please visit the OIC website

Parameters (SPDR Gold ETF – GLD)

Status: opening

Trade: buy +1 butterfly GLD 100 1 SEP 121.5/120.5/119.5 PUT @ 0.14 LMT.

Maximum risk (expiration): $0.14 (per contract)

Maximum gain (expiration): $86 (per contract)

Breakeven (expiration): up $121.37, down $119.63

Entry: today using the combination order ticket form ST2

GLD ticket


Stop: no stop

Target: $120.50 or near

Time horizon: seven days


— Edited by Michael McKenna

For more on contract options click here.

Non-independent investment research disclaimer applies. Read more
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2y
Mekong Mekong
Perhaps I have this wrong, but you say the 15th September put, but the trade ticket says 7 days to expiry.
2y
Georgio Stoev Georgio Stoev
Good catch Mekong. It's 1 SEP expiration.
2y
chaim chaim
lost here big time on gold i was short need to cover lets wait 1 more day
2y
Georgio Stoev Georgio Stoev
Bummer:( a long call butterfly could be used to hedge a short....
2y
chaim chaim
but you was saying long put but so i short gold ouch
2y
chaim chaim
but next trade
2y
Georgio Stoev Georgio Stoev
Yes, the example we gave was if you were long and wanted to defend this position with a long put butterfly.

If one is short, they can hedge with a long call butterfly... https://www.optionseducation.org/strategies_advanced_concepts/strategies/long_call_butterfly.html

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