FMX | Connect (Reported 6/09/2011)
The following is a report of Gold Option’s activity in the Over-The- Counter and Exchange traded venues. Information is compiled and summarized below.
Summary
August Gold settled at $1542.70 per troy ounce, a gain of $4.00 for the day. Volatility was offered on the day but market participants remain reluctant to sell call skew.
Market Recap:
Today was an interesting day from several perspectives. The best way to describe it from a futures perspective is to use the analogy of what happens when an unyielding force meets an immovable object. In this cast the unyielding force consists of the speculative buying that we’ve been seeing for the last 2 weeks right above the long term daily trend line (See Chart Below). The immovable object is whoever is selling in the 1550/1555 area. The market can just not get through this area. Today futures hit 1550.8, turned on a dime, paused for an hour and sold off the rest of the day. Options performed as they usually do in these type of ranges. Volatility began the day offered and remained offered during the first leg of the rally up to 1545 with the caveat that risk reversals caught a bid for the call. When stops were hit above 1545 volatility took on a definite bid and call offers all but disappeared. One hour later volatility and skew were back where they started.
In terms of trading, the day started off with dealers heavily offering back month straddles (April 2012 – December 2012), as much as $6 below settlement. The front part of the curve also came in. Straddles were in 3-6 dollars on the day. More and more, futures and options seem to be tied together. There don’t seem to be any lasting bids for volatility as long as the market stays below 1550.
As a side note, there has been speculation in the market that John Paulson may be liquidating some of his gold inventory due to potential redemptions in his fund after the highly publicized collapse of Sino-Forest Corp. (Paulson & Co. was reported to own about 14% of shares). We have spoken to several fund managers who expressed interest in the possibility. Our own observations have not confirmed this.
Directional Commentary:
Options: Options speculators are extremely bullish. On top of that, liquidity providers may be overexposed. Offers back away very quickly when the market rallies and as a result, call skew is at very high levels for October on back. It is dangerous to be short calls in this market right now as liquidity is fickle. When the market moves higher there are no sellers. Speculatively speaking, we would be buyers of calls above the congestion area discussed in our technical analysis. Bears may want to consider selling hedged call spreads. Options Conclusion: Bullish
Technicals: The trading range remains intact and while we bounced off the 1550 area decisively once again the unyielding force alluded to earlier may soon have its day.If you asked us where the market was headed last week we would have said we expect the first $10 would be up but the next $50 would be down. Now we feel the opposite is more likely.Yesterday our technical concluded the market was bearish/neutral. Today it is neutral/bullish.
Active Options
N 1550 C
V 1570 C
Z 2000 C
ATM Volatility Curve:
As of 4:00 P.M.
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| N11 | 1543 | 33 | 37 |
| Q11 | 1543 | 60 | 64 |
| V11 | 1544 | 106 | 110 |
| Z11 | 1545 | 141 | 145 |
| G12 | 1545 | 180 | 184 |
| J12 | 1550 | 210 | 214 |
| M12 | 1550 | 237 | 241 |
As of 4:00 P.M.
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