Trade view /
25 August 2017 at 11:13 GMT
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.
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Source: Saxo Bank
While we are not attempting to pick a top here, we can't help but notice the following three triggers:
- The established range over the last four months
- Low implied volatility
- 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.
Here's the spread's P/L graph for the weekly GLD options.
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)
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
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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