Options Trading Ideas Since Gold Rallied Again "Somewhat Mysteriously"

03/07/2016 8:00 am EST

Focus: FUTURES

Fred Oltarsh

, OPTIONS STRATEGY NETWORK

For those interested in trading options and initiating options trading strategies based on implied volatility, Fred Oltarsh at Options Strategy Network thinks the recent Gold futures situation might be an excellent opportunity to design a limited risk long options position enhanced by a comparatively low implied volatility.

The Gold market has rallied somewhat mysteriously recently as stocks and Crude Oil have gained footing. It is substantially easier for the average investor to participate in the Gold market these days through, not only the most liquid and cost effective Gold futures, but ETFs and other vehicles which attempt to mimic the price action of Gold futures. As money pours into those assets, Gold futures prices rise due to hedging. Gold mining stocks, ETFs, Triple ETFs, and Gold futures have an arbitragable relationship which can ultimately induce the Gold market to experience excessive volatility. When Gold futures were the predominant vehicle for trading Gold, the market was typically less volatile. Explaining the recent rise in prices is difficult, but owning Gold as a safe haven has always been popular and the potential to have a President of the United States who is more volatile than commodities may be one of the reasons.

As of Friday, March 4, the twenty-day historical volatility for Gold futures is greater than 23.50%, however the implied volatility of the April at-the-money Gold options is about 21% and the June option has an implied volatility of about 3/4% lower. For those interested in trading options and initiating options trading strategies based on implied volatility, this may be an excellent opportunity to design a limited risk long options position enhanced by a comparatively low implied volatility. Whether one is interested in straddles, strangles, or outright options, given the relative strength index of Gold futures, which is greater than 72, there are a multitude of strategies which may be suitable for the Gold trader.

One might feel that the Gold market is getting a bit toppy. They might come to this conclusion because of, not only the high relative strength index, but the fact that Gold is rapidly approaching $1300. At that level, there may be quite a bit of resistance. For those feeling a bit bearish, there are numerous put strategies they might implement to get short Gold futures. If, on the other hand, one was interested in going long Gold futures through options trading, the relationship of the implied volatility and the historical volatility provides a multitude of opportunities to establish positions which may benefit from the volatility relationship.

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By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network

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