FxWirePro: Intricacies of Gold’s Call Spreads on IV skews

Gold vols: The positively skewed IVs of 3m gold contracts (XAUUSD) are still indicating the upside risks and 1m implied volatility is spiking above 8.2%.

With the wages print that came in soft in last Friday’s US jobs report, gold realized vol should remain contained. The US unemployment rate came in at 3.8 percent in March 2019, unchanged from the previous month's figure and in line with market expectations. The number of unemployed persons decreased by 24 thousand to 6.2 million while employment dropped by 201 thousand to 156.7 million.

The returns on gold vol trading have been mediocre and quick to reverse in recent weeks. 

Our gamma trading model continues to indicate gold gamma to be a sell but at a lower conviction. Front-end spot-vol correlation underperformance weighed on risk reversals, which are back to nominal levels. 

Meanwhile, the back-end riskies continue to look rich vs. the ATM vols, moving the needle in the direction of long expiry call spreads. 1Y ATMF/25D XAUUSD call spread shows 3.8X max payout to cost ratio and comes at a 41% discount to outright vanilla.

Notably, 3M silver vol is 2 sigma cheap (1yr basis) though the 1 vol rolldown is putting further downside pressure. We are watching it as an RV vs gold for more favorable net vol carry entry levels. 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 12:08 GMT. 

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