Gold prices plummeted considerably in the recent times; breaches $1,300 -1,250/oz support band on stale long liquidation and as improving economic data dents its safe-haven appeal. For today, attempting to show little strength, where now for gold?

Gold prices tumbled this week losing 3.3% on Tuesday alone amid a stronger dollar, rising US bond yields and unconfirmed reports that the ECB was planning to wind down its QE programme by tapering its asset purchases.

Over the past two months or so gold was range bound between $1,300-1,350/oz, and a failure to mount an upside break was increasingly becoming ominous. Indeed, a move lower towards the lower end of that trading band was always likely to unleash a wave of stale long liquidation and selling.

The elevated level of long speculative positions indicated that gold remained highly vulnerable, as an even slight improvement in investors’ enthusiasm and a shift in sentiment towards gold to more bearish could trigger massive long liquidation and reverse gold’s impressive gains. This was true also for the other precious metals.

Last week, prices plunged $62.23, or 4.71%, its biggest one-week percentage drop since last April, as the U.S. dollar climbed to a two-month high and stocks rose.

OTC outlook:

The current implied volatility of XAU/USD ATM 1w contracts are at 13% with skews signifying hedgers interests are in well balanced on either sides but slightly biased towards OTM call strikes, and it is likely to spike higher for 1m tenors.

While delta risk reversals substantiate these figures with upside risk sentiments (observe positive shifts across different tenors). By this, we mean guaranteed hedge at the higher strike (worse than the outright forward rate if unleveraged) in order to benefit from a favorable market move down to the lower strike.

Hedging Strategy: Option straps (XAU/USD)

As the risk reversal numbers allow for a customized hedging solution, tailored to your risk and hedging profile contemplating both side risks. Risk Reversals are OTC derivative instruments and the notional amount does not need to be tied up throughout the full tenor of the trade.

Nonetheless, usual margin requirements still apply. Usually, Risk Reversals are structured as zero premium hedging solutions.

For today, the Gold futures for December delivery on the Comex division of the NYME rose by as much as 0.8% to touch $1,263.50 a troy ounce. A day earlier, the yellow metal dipped $2.10, or 0.17%.

Hence, we recommend deploying hedging strategies to arrest upside risks with longs positions in 2 lots of 0.51 delta ATM calls with 1M expiry and 1 lot of -0.49 delta ATM puts of 2w expiries.

Subsequently, this XAUUSD option straps strategy would take care of ongoing upswings and abrupt downswings and yields handsome returns.