FxWirePro: Bullion’s Prices, OTC Market Updates and Derivatives Strategies

Gold attempts to bounce back above $1,425/oz level from the last 2-3 days, the surprisingly positive US nonfarm payroll numbers sparked some rethink about US rate cuts.

There are two notable exceptions in the declining turnover pattern shown in the 1stnutshell: Bund and Gold futures. For Bunds futures, the turnover is not only up vs. last year but also sequentially between Q1 and Q2. Gold futures turnover is down from last year, but the increase between Q1 to Q2 has been the biggest across asset classes. This suggests that more flow has been behind the repricing of these two assets classes in recent months.

OTC Updates for Bullion Market: Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks, bids for OTM call strikes up to 1520 signifies hedging sentiments for the higher price risks. One could also see a bullish risk reversal setup. To substantiate the above bullish sentiment, risk reversal (RRs) numbers indicate an overall bullish environment. 

The above risk reversal numbers have been known as a gauge of gold’s underlying market for bullish opportunities. Well, we know that options are predominantly meant for hedging a probable risk event in the future.

Options Strategy: Capitalizing on the minor shift in risk reversal numbers of gold in the short-run and bullish neutral risk reversals of longer tenors, we advocate longs in gold via ITM call options.

Buy 3m XAUUSD ATM -0.70 delta calls on hedging grounds. If expiry is not near, delta movement wouldn’t be 1 point increase with 1 pip in the underlying movement, which means if the spot moves 1 pip, depending on the strike price of the option, the option would also move less than 1. Thereby, in the money call option with a very strong delta will move in tandem with the underlying.

Alternatively, on hedging grounds, we advocated long positions in CME gold contracts. We now like to uphold the same strategy by rolling over the contracts for August’19 delivery as we could foresee more upside risks. Courtesy: Sentrix, CFTC, JPM & Saxo