Hedge XAU/USD using Spreads and Combinations

Chinese & Indian gold imports were reduced during 1^st quarter in 2015. But for now these high consuming gold nations such as China & India are showing vested interest in yellow metal, however, gold prices fell see-sawed in Asia on Wednesday as investors eyed a manufacturing survey from China and awaited events in Greece for more direction.

Overall, dollar will play a major role while resilient commodity price matters.

We recommend deploying either diagonal call spread or zero cost collar on falling wedge formation whichever is suitable to the portfolio depending on quantum of FX exposure, risk appetite and returns expectations.

Option Insights & Strategies: Diagonal Call Spread & zero cost collar (XAU/USD)

Buy 60D (far month) 0.15% Out-Of-The-Money carrying 0.5 delta call (strike at 1174.99) and simultaneously short 15D (near month) (-0.15%) In-The-Money call (strike at 1171.47) with positive theta value.

As you can observe on the above diagrammatic representation of this strategy, almost more than 50% of the cost is flowing in through ITM instrument. (Note: for demonstration purpose we've used same maturity).

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 ITM 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 position is established by buying protective 0.5 delta At-The-Money put option while writing 21D Out-Of-The-Money covered calls (strike at 1180.30) with around 30+ Theta value.

The strike price at which the premium received (i.e US$ 1250.37) cushions as the premium of the protective put.

For current technical situation as explained our earlier post, this strategy can be employed to hedge the upside risks of commodity exposure and participate in any potential bull run.