Afternoon Gold Fix – March 14, 2011
FMX | Connect (Reported 3/14/2011)
The following is a report of Gold Option’s activity in the Over-The- Counter and Exchange traded venues. Information is compiled and summarized below.
Summary
April Gold settled at $1424.90 per troy ounce, a gain of $3.10 for the day.
Active Options
Z 1200/1100/1000 P. tree trds 6-6.4 1500x (comex)
M 1325 P / 1575 C fence trds 2.7 1000x (comex)
M 1450 C trd 29.5 (comex)
Analysis:
Volatility was slightly firmer on the open with little activity to back it up. When order flow came in it was a mild repeat of Friday’s activity; First dealers purchased the December 1000/1100/1200 put tree. Market makers were eager to sell and cover their downside exposure. It was a good match for both sides and we suspect dealers have this spread worth much more than it is trading (more on this later). Another bullion dealer sold June 1450 calls at 29.5 with June trading at 1427.4, keeping a lid on volatility in the rally. The only other trade of significance was a June fence where a bank sold put and bought call, hitting fund and market maker bids.
Commentary:
These are dangerous times to be a market maker in gold options. Positions get stretched to the extremes of their tether while nothing significant happens in the underlying. We personally think the December put tree is worth a lot less than it is trading. Our rationale is that $100 lower the change in vol exposure will kill someone who is short the 2. On the other hand, the banks selling the 2 and buying the 1 have just the type of deep pockets that can weather such a massive change in volatility exposure. Directionally this market remains range bound, trading and settling above 1409 will bring futures to 1429, as happened today; sustained momentum below 1409 will bring us to 1385. The question remains what will happen on the upside if we trade 1441 and the trend line is tested?
Silver has seen little activity to warrant comment. Funds are selling May puts and buying May calls while dealers are doing the opposite. Market makers are holding their breath.
ATM Volatility Curve:
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| J11 | 1425 | 30 | 34 |
| K11 | 1425 | 56 | 60 |
| M11 | 1425 | 76 | 80 |
| Q11 | 1430 | 116 | 120 |
| V11 | 1430 | 151 | 155 |
| Z11 | 1430 | 179 | 183 |
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