FMX | Connect (Reported 4/01/2011)
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
June Gold settled at $1428.90 per troy ounce, a loss of $11.00 for the day. In a wild day the market came in lower and continued lower down to the 1414 area, but then inexplicably reversed and had a slow and steady reverse for the rest of the day. Volatility was offered most of the day but reversed direction once again as the market broke through 1420 on the downside.
Analysis:
As has come to be expected in a lower call volatility starts out offered from the get-go. Everything was buyable except the June 1550 C, which had seen short-covering throughout most of the day by liquidity providers seeking to cover options they had sold previously. About midday the market broke lower and volatility started to firm up slightly in May. Again this is to be expected but what happened afterwards after this was a little surprising. Put bids came out of the woodwork in December, specifically the 1200-1300 area, most likely on the back of floor and OTC fence deals. What truly was shocking and will cause an uproar in the market is the announcement by President Obama of a 40% tax on all holders of physical gold.* This best explains the reason for the put frenzy. It is clear that there are people buying naked puts in this market. Yesterday was the June 1375 P, the day before it was the May 1300 P and today it was the December put wing.
On the day, volatility finished weaker in the shorter-dated months and firmer in the backs on the strength of put buying.
Commentary:
Technically speaking, once again we touched the 1414 area and it held like a champ. We now have a double bottom in that area. If you are bullish its a good excuse to get long. However, if this morphs into a triple bottom, don’t be so thrilled. Next time down it probably won’t hold. Note: we now have a triple top at 1440 so next time up that shouldn’t hold either. Regarding options, the market is behaving in bifurcated fashion; one will note that volatility is up in the backs because of put buying but down in the fronts because of call selling. Everything about this option trading is bearish. Back month put buying is normally from producer or macro hedge fund selling while shorter dated option selling means a slow move lower. It’s extremely important to note that this is exactly what happened in silver last year; the market moved sideways while producers came in and hedged 2012 production. The end result was a massive put skew in the backs while front month straddles never reached break-even.
Active Options
Z 1200 P
K 1300 P
M 1550 C
*April Fool’s
(In memory of Benny)
ATM Volatility Curve:
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| K11 | 1430 | 36 | 40 |
| M11 | 1430 | 59 | 63 |
| Q11 | 1430 | 100 | 104 |
| V11 | 1430 | 135 | 139 |
| Z11 | 1435 | 163 | 167 |
| G12 | 1435 | 192 | 196 |
| J12 | 1435 | 211 | 215 |
| M12 | 1440 | 238 | 242 |
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