FxWirePro: XAU/USD to retest 5.5 year’s low; hedge with calendar spreads

Technical Inference:

We are bearish on the precious metal as it has been tumbling consecutively along with crude prices from last couple of months but as stated in our earlier post it has to test support at around 1171.28 levels if at all it has to bounce back until then we foresee downswings in medium terms. Today's closing would be keenly observed, if it manages to hold then sharp bounces are certain, otherwise it's going to be pure gamble for expecting upswings.

RSI, Stochastic curves have been powerful in suggesting current bearish trend to prevail as they reached oversold territory but no trace of recovery.

Those who suspects bullish sentiments in bullion markets can hedge yellow metal with At-The-Money 0.5 delta calls.

Or the traders who are risk averse, we continue to recommend deploying either diagonal call spread or zero cost collar whichever is suitable to the portfolio depending on quantum of FX exposure, risk appetite and returns expectations.

Buy 45D (far month) At-The-Money 0.51 delta call and simultaneously short 15D near month (1%) Out-Of-The-Money call with positive theta value. But always have this in mind that the shorting instruments with +ve theta to be analyzed with other option Greeks during selection of such short side options.

If shorting a call in the above strategy at current position is perceived as a risky venture then the zero-cost collar is recommended to participate in the potential bull run on verge of surge in the dollar. This strategy can be executed by buying 1M protective At-The-Money 0.5 delta put option while writing 21D Out-Of-The-Money covered calls with around 30+ Theta value.