Tuesday, April 26, 2011

Suggested Option 1X2 Call Spead For Toppy Gold

The figures are a little out of date, as gold has done some falling since, but the strategy is worth considering. It's a mildly bearish call spread, from Fred Oltarsh of Libanman Futures, that takes advantage of volatility differences between gold futures options' implied volatility and the historical volatility of the underlying futures contract itself:
Here’s how the trade works. The historical volatility in August Gold Futures on a 30 and 60 day basis is approximately 11.75%. The implied volatility of the $1600 Call, however, is 17.75%. We’re going to Buy one $1550 Call with an implied volatility of 16.80% while selling two of the $1600 Calls. This provides us with the opportunity to establish a short delta position of approximately .14. In addition, we get short a bit of vega and hopefully can take advantage of the implied/historical volatility difference. The details are in the Table [in the article itself].
The trade leaves an $8.80 credit in the account using his figures, and has a maximum profit of $58.80. He suggests calling him for questions on how to implement it.

The strategy might be worth updating with current figures. Sadly, given gold's recent stumbles, the premiums of the $1,600 calls to be sold have likely shrunk relative to the $1,550 call to be bought - but that doesn't mean it isn't profitable still.

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