FxWirePro: Stay hedged in Silver via 3-way straddles vs OTM Calls on mounting bearish sentiments in OTC bullion

As the U.S. Federal Reserve has maintained status quo at its monetary policy meeting yesterday (funds rate at 1.00%) due to pauses to parse more economic data but may hint it is on track for an increase in June, bullion’s both spot and OTC markets have been highly active today.

Turning to silver more specifically, investor demand on the COMEX has primarily driven silver prices higher so far in 2017 with ETF demand and physical investment appearing lethargic from the 1Q data we have. 

OTC updates:

Prices in bullion markets have tumbled, gold declined from the highs of $1,295 and silver from the peaks of $18.647 to the current $1,234 and $16.434 levels respectively.

While hedging interests for downside risks are mounting as you could easily make out from the negative risk reversal numbers along with the corresponding noticeable spike in IVs of 1-3m tenors.

The implied volatilities of XAUUSD (gold) ATM contracts are spiking shy 10.5% and 11.41% of 1m and 3m tenors respectively, while above 18.5% and 19.25% for XAGUSD (silver) ATM contracts of 1m and 3m tenors respectively, while the spot price in technical trend approaching near crucial juncture, falling below 7 & 21 DMAs with bearish crossover (refer above technical chart), but it seems the major trend has been in consolidation phase we foresee equal opportunity for both bulls and bears with option writers of deep OTM calls are on slight upper hand.

Hedging Framework:

3-Way Options straddle versus OTM call
Spread ratio: (Long 1: Long 1: Short 1)

How to execute:

At spot reference: 16.474 an ounce, initiate long in XAGUSD 2M at the money +0.51 delta call, go long 2M at the money -0.49 delta put and simultaneously, short 2w (1%) out of the money call with positive theta.