FxWirePro: Hedge and speculate XAU/USD using Spreads and Combinations

The precious metal has been tumbling consecutively from last couple of weekly but it seems to test support at 1145.58 to bounce back. Falling wedge formation has occurred on weekly charting, since this is bullish pattern regardless of trend reversal or continuation, we foresee anytime pices may spur to take off.

On the back of falling wedge formation, with the hopes of potential spikes in prices bullion traders can hedge At-The-Money 0.5 delta calls at present juncture for the targets at 1200 levels.

Option Insights & Strategies: Diagonal Call Spread & zero cost collar (XAU/USD)

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

Buy 60D (far month) At-The-Money 0.51 delta call (strike at 1154.17) and simultaneously short 15D (near month) (1%) Out-Of-The-Money call (strike at 1165) with positive theta value.

As you can observe on the above diagrammatic representation of this strategy, almost more than 50% of the cost is flowing in through ITM instrument. (Note: for demonstration purpose we've used same maturity).

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 ITM 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 (strike at 1177) with around 30+ Theta value.

For current technical situation as explained in our earlier post, this strategy can be employed to hedge the upside risks of commodity exposure and participate in any potential bull run.