FxWirePro: Ideal time to capitalize on gold’s prevailing dips – Bid ITM delta XAU/USD calls to optimize hedging

Gold’s bearish streaks have continued last weekend’s slumps, XAUUSD was trading at around $1,286.10 areas with momentary selling momentum while articulating. But the major trend of this precious metal has gone in the consolidating phase. Hence, we reckon that the prevailing slumps seem to be momentary, the wise traders will utilize these dips as better entry points with a view of maximizing returns from long trades.

Amid equity markets moving to fresh year-to-date highs, the global equity strategists remain constructive, seeing the current market backdrop as very similar to the 2015/16 mid-cycle correction episode, rather than the end of the cycle. This could, in theory, begin to increasingly erode any built-up “safe haven” gold demand. 

To this end, despite a reduction of more than 38,000 contracts last week, net non-commercial positioning on Comex still stands just below 100,000 contracts long. 

OTC Updates for Bullion Market:       

Please be noted that the positively skewed IVs of 3m XAUUSD contracts are still indicating the upside risks. One could see a bullish risk reversal setup. To substantiate the above bullish sentiment, bullish neutral risk reversal (RRs) numbers indicate 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: Contemplating the prevailing dips of gold price in the short-run and OTC indications, bullish neutral risk reversals of gold, longs in gold via ITM call options look to be attractive.

Buy 3m XAUUSD (1%) ITM -0.69 delta calls on hedging grounds. If the 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. Courtesy: JPM, Sentrix & Saxo

Currency Strength Index: FxWirePro's hourly EUR spot index is flashing 72 (which is bullish), while the hourly USD spot index was at -32 levels (mildly bearish) at 12:33 GMT. 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex