FMX | Connect (Reported 6/24/2011)

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 $1500.9 per troy ounce, a loss of $19.60 for the day.  Volatility was bid in the selloff with put buyers overwhelming the market and speculators liquidating calls.

Market Recap:

Today's option activity showed the other side of Gold's bipolar nature. We’ve mentioned it many times before, that the back half of the curve is dominated by call buying speculators while the front part of the curve is the domain of GLD hedgers. Before today’s selloff a prop shop purchased the 1400/1450 1by2 put spread. They bought the 2 and sold the 1. The structure actually sold vol., But by the end of the day, even with volatility higher the seller was profitable. This is entirely because the market moved heavily towards a put skew. We would expect more of the same if the market continues to sell off. One should expect volatility to back off aggressively if we bounce. We feel the call buying in October will dry up and straddles there are a sale. December however will retain speculative interest.

We stated two days ago that precious metals were on our radar for a major selloff. Our indicator proved correct and gold capitulated yesterday. If the indicator remains true to form, this market could see 1460 in a week. Regardless it’s given us $40 of downside already.

Interestingly enough, Silver did not trigger its alert until today's close. We would say that while gold has been the weaker of the two metals in this selloff, silver may be catching up next week.

Comments on the SPR Release

President Obama with coordination from the IEA agreed to release oil from the SPR in an attempt to quell concerns about high gasoline prices. This has been discussed ad nauseum. We would like to put in our two cents. First, as many already have said, any oil that is sold now, must be bought back later. Second, from the opposite point of view, the government can buy it back whenever it wants. Therefore, from this, it is not that bullish, as there is no imperative to buy back the oil anytime soon. As a side note, our Government could have been selling puts and or selling call for years to create revenue on an otherwise inanimate object sitting in the ground. We think they are generally lacking commodity risk.

Our two cents are as follows. It does not pay to fight the government right now. Even though Bernanke can’t print more oil it is clear that we are entering into a new phase of a centrally planned economy. To us this smacks of price controls. When you combine it with the Dodd-Frank bill prohibition of OTC gold trading, you might see that we are setting up for something worse. Tin Foil Hat Alert: All gold will trade through exchanges and while we don’t think ownership will be prohibited it may be taxed to death.

Directional Commentary: 

Options: The emotional indicator continues to switch from greed to fear as GLD related put buying has spread from July through October while traditional speculative call buying has withered away. Many would interpret this as bearish and we wouldn't disagree. But all that says that if we rally back vol. will get hammered and if we selloff vol. will explode. In either direction, calls will not be invited to the party. Options Conclusion: Bearish

Technical's: Gold is oversold right here. It has had two monster down days, breaking through its long term trend line and its 50 day moving average, a important touchstone for the last year. A bounce should be forthcoming. We would pick spots and lean into it as long as the market remains under 1518. Our target is 1460 with a stop at 1520. Technical Conclusion: Bearish, Short Term: Bullish

 

Active Options

N1500 call

N1520 call

Q1400 put

Q1450

 

 ATM Volatility Curve:

As of 4:00 P.M.

 

Volatility Smile:

***From NYMEX Settlement

 

End of Day Straddles

GC
	Future	Straddle
N11	1500	11.1
Q11	1500	52.81
U11	1500	76.52
V11	1500	98.97
X11	1505	118.17
Z11	1505	133.91
F12	1505	155.11
G12	1505	171.74
H12	1505	184.96
J12	1505	201.13
K12	1510	215.45
M12	1510	229.1
N12	1510	243.41
Q12	1510	256.02
U12	1510	269.75
V12	1510	280.81
X12	1515	293.19
Z12	1515	306.21

As of 4:00 P.M. 

 

 

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