FMX | Connect (Reported 7/08/2011)
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 $1541.60 per troy ounce, a gain of $11.00 for the day.
Market Recap:
Gold traded as low as 1525 overnight and came in printing 1528. The market seemed poised for another sideways day before the employment numbers jolted the markets into action. Unemployment rose .1% to 9.2% and June nonfarm payrolls increased by only 18,000, significantly below market expectations. This was especially disappointing. The stock market sold off, the gold market rallied and oil slid lower. Our own observations mirror the comments made by various traders we speak with during the day: Try as it may, the government can’t create jobs by debasing the currency. The second point is that soft employment numbers open the door for QE3. At the very least, it undermines the Fed’s will to raise rates anytime soon. All in all, a classic stagflation scenario.
Before the Comex open an extremely lucky or skilled (dare we ask connected?) speculator bought approximately 500 August 1540 Calls and seemingly flipped them for a tremendous profit. By our rough calculations he purchased at an average price of $12.50 and sold at an average price $18.10 later in the day, capturing $6.60 in premium. Better than a sharp stick in the eye, from our perspective. Michelle Obama was unavailable for questioning (and to those of you old enough to remember shades of Hilary Clinton and Tyson food, we are kidding). Short-dated options were aggressively bid, specifically the August 1600 Call and September 1700 Call, which were purchased all day long. Once again though, by the end of the day, volatility was unchanged.
To recap, we are in a market that loves calls, but when the futures market complies and rallies, straddles are offered. It’s not supposed to happen that way. To our minds, volatility is a stochastic process, but we can’t fight the tape. The October 1600 Calls, which have been in a bit of a bubble over the last two months since a speculative buyer purchased them (see Doug Kass for the maligned version) are settling at more moderate levels. There is still large buy interest, but the impulsive nature of the purchases seem to be subsiding. We expect that as the 1600 Call becomes an At-The-Money option and loses its speculative status, it will be sold in straddle form.
In recent months there has been much pressure on options between the 1700-1800 strikes from October on back. This pressure seems to have subsided and we think a $20 move higher will restore their popularity with speculators. Dealers were in the market once again with two-way business. Some were offering straddles and others were bidding October 1600/1700 Call spreads. Neither were aggressive.
One trade worth mentioning was the December 1400 Conversion, with more than 2000 lots trading. To summarize this trade, dealers lent money to the ring at around .7% (2.1% ROR annually). The traders who borrowed the money have to borrow at 1.25% or more from their clearing firms, so this was a welcome trade for all participants. Sidenote: It’s nice to be a bank borrowing at zero percent from Uncle Sam and lending back to tax payers at .7%. Our government has made yield curve arbitrages like this possible with its monetary policy simply to keep the TBTF banks alive, national debt be damned.
Directional Commentary:
Options: Volatility finished unchanged on the day despite an aggressive spike higher on the unemployment number. Skew finished higher to the call side as well, but puts were not as heavily offered as they have been during this run. The options market is telling us we are going to have an orderly move higher or a wash-out lower. We don’t necessarily agree with this but that’s what the tea leaves are saying. When you look at the fact that this market has rarely had more than a 2% move higher on any day it’s pretty obvious to see why straddles get sold even though calls are being bought. For example, break-even in October is $14.50. We barely reached that today despite all the chatter about gold being higher. Conclusion: Bullish
Technical: Yesterday, we said that above 1535 in August gold we could see a run-up to all-time highs. The market is showing some congestion in the 1550-1555 area but could find some legs above that level. A settlement below 1520 would undo the current momentum; it is otherwise safe to buy dips. We’re confident the market will test 1555 again. Technical Conclusion: Bullish
Active Options
Q 1540 C
Q 1600 C
U 1700 C
V 1600/1700 C. sprd
Z 1400 Conversion
ATM Volatility Curve:
As of 4:00 P.M.
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| Q11 | 1540 | 34 | 38 |
| U11 | 1545 | 59 | 63 |
| V11 | 1545 | 83 | 87 |
| X11 | 1545 | 102 | 106 |
| Z11 | 1545 | 118 | 122 |
| F12 | 1545 | 140 | 144 |
| G12 | 1545 | 154 | 158 |
| H12 | 1545 | 171 | 175 |
| J12 | 1545 | 189 | 193 |
| K12 | 1550 | 203 | 207 |
| M12 | 1550 | 217 | 221 |
As of 4:00 P.M.
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