Gold spot is struggling to break and sustain above the resistance at 1250 levels despite CFDs have been drifting up, or April delivery on the Comex division of the NYME inched up $ 1.30,  to trade at $1,243.10 a troy ounce by 09:05 GMT, a day before yesterday when it was nearing above resistance level, gold plummeted from the highs of 1248.40 to close at 1231.08, or 0.89%.

The implied volatility of 1W XAU/USD ATM contracts 22%.

The premiums of 1W ATM contracts are trading at 26.67% more than NPV, hence, contemplating this disparity with risk reversal we think the opportunity lies in writing a call while formulating below strategy for gold's uncertainty at this juncture.

Hedging Framework:

3-Way Options straddle versus Call

Spread ratio: (Long 1: Long 1: Short 1)

Rationale: ATM premiums are trading 26.67% more than NPV, while implied volatility of these ATM 1W contracts are at 22%, hence there exists a considerable disparity between premiums and vols that keeps us eye on shorting such expensive calls with shorter expiries. As a result, we capitalize on such beneficial instruments and deploy in our strategy.

How to execute:  

Go long in XAU/USD 3M At the money delta put, Go long 6M at the money delta call and simultaneously, Short 1M (1.5%) out of the money call with positive theta.