FxWirePro: Delta risk reversal indicates gold to lose its shine again – option strips for hedging

Delta risk reversal is shifted into red zone again with increased volatility. Gold was fallen to a 5.5 years low of $1,073.53 on 20th July amid the Fed's speculation of rising interest rates in September for the first time since 2006. Since then we already reiterated the prices to have rebound approximately 3%.

Gold prices have been consistently rising from then to hold near a three-week high as China's surprise move to devalue its currency fanned optimism that the Federal Reserve could delay raising interest rates until the very end of 2015. Further the positions constructed for bull overview will increase in value with time decay.

After this short term price recoveries, delta risk reversal as shown in the nutshell suggests downside hedging has been relatively expensive and daily technical chart makes us to have quite dubious eyes on prevailing bull run as there is now bearish signal generated by weekly RSI and slow stochastic, while stochastic has approached overbought trajectory and attempting for %D crossover.

It is wise to build option strategies for hedging while considering delta neutral and gamma neutral and relatively high sensitivity to standard deviation, but always have this in mind that the HY vols can be traded vega spreads on a speculation grounds.

Option Strategic Framework: Option strips (XAU/USD)

Buy 15D At-The-Money delta call option and simultaneously short 2 lots of 15D At-The-Money put options with positive theta values. As we anticipate this precious metal to fall in short to medium run but as a matter of hedging in long run, this strategy involves buying a number of ATM calls and double the number of puts. The strip is more of customized version combination and more bearish version of the common straddle.Huge profits achievable with the strip strategy when this precious commodity makes a strong move either upwards or downwards at expiration, with greater gains to be made with a downward move. Hence, any hedger or trader who believes the gold price is more likely to plunge downside can go for this strategy. Cost of hedging would be Net Premium Paid + brokerage/commission paid.