Exotic Derivatives Trading

February 20, 2009

Why Gold?

Filed under: Derivatives Strategy — Exotics Trader @ 5:17 pm

People have lost confidence in dollar as a currency and if you had a major chunk of your earnings in $, what would you do? Buy tons and tons of Gold. This is what oil producing countries like Russia and Qatar are doing. Also with the countries printing currency notes, inflation is going to be a major concern in future. http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3463196.ece

CUMULATIVE OPEN INTEREST OF PUT &
CALL
OPTIONS on GLD US Equity – March 2009

The blue line flattens at around 150k contracts, whereas the red line flattens at around 350k contracts indicating that there are 2.3 times as many bets that gold will rise than fall. Also investors are betting heavily that GLD US Equity price will increase to at least 105. An aberrant change in slope of blue line at strike level of 91 indicates that there is much less enthusiasm to bet on gold falling below that level.

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Volatility surface of GLD US Equity

The above figure highlights the widening spread between the implied volatilities of the up strike calls and the implied volatilities of the down strike puts. This phenomenon can be explained by greater demand of up strike calls.

Trade idea: Buy a call spread because of the bullish view and negative skew (makes the structure cheaper since call spread is long skew), can fund the purchase of call spread by selling a put spread or a down and out put (both short skew structures). For a tenor of 1 month: Long 98-105 call spread, short a 90-95 put spread.

 

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1 Comment »

  1. Your blog makes me happy.

    About the trade in general, I like it, nice alternative to buying calls outright as you take advantage of the arb in the verticals.

    Comment by Steve Place — March 9, 2009 @ 7:04 pm | Reply


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