FxWirePro: XAU/USD hits 5-year low, binary calls for bullion speculators, diagonal spreads for hedgers

Technical Inference:

The precious metal has been tumbling consecutively from last couple of weeks but as stated in our earlier post it is testing support at around 1145 levels to bounce back. Falling wedge formation has already occurred on weekly charting, since this is bullish pattern regardless of trend reversal or continuation. Today's closing would be keenly observed, if it manages to hold then sharp bounces are certain, otherwise it's going to be pure gamble for expecting upswings.

RSI, Stochastic curves have been powerful in suggesting current bearish trend to prevail as they reached oversold territory but no trace of recovery.

Those who suspects bullish sentiments in bullion markets can hedge yellow metal with At-The-Money 0.5 delta calls at present juncture for the targets at 1200 levels.

Or the traders who are risk averse, we continue to recommend deploying either diagonal call spread or zero cost collar 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 and simultaneously short 15D near month contract (1%) Out-Of-The-Money call (strike at 1165) with positive theta value.

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 a 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 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.