FMX | Connect (Reported 4/28/2011)

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 $1531.20 per troy ounce, a gain of $14.10 for the day. The contract printed fresh highs and option trading was dynamic.

Commentary & Analysis:

Futures opened up in the 1430 area, above where they went out last night on the Globex close. Options immediately underperformed. By underperformed, we mean relative to yesterday at 4:30 as opposed to yesterday at 1:30 when the Comex closed. It makes sense that option volatility would get hit, considering that truly all the news was out.

The day started with a seller of the August 1750 Call. They traded 7.50 and $5 higher, you could still buy 7.50s. The call wing proceeding to take a beating in every month, specifically for calls 10 delta and lower.

We can say that the volatility of volatility has increased dramatically. It’s clear that market makers are fading away from every big order that comes into the ring, creating volatility swings on a minute to minute basis, as they seek to digest the business coming in. Around 11:30 a decent-size buy order came in for the August 1650 Call, on top of of fresh contract highs for the future in the 1536-37 area. This order was different from the August 1600 C buyer order but scary nonetheless. 2000 lots were bought in 500 lot clips. The buyer knew what he wanted and he got it done. On the floor, the August 1600/1750 1x2 Call spread was quoted and traded for volume with the customer purchasing the August 1600 C. Locals and market makers don’t mind this trade as everyone needs upside to cover VAR risk. And let’s face it, the June 2000 Calls aren’t helping anymore.

We can’t help but feel this market is being managed on some level. We’ve had an orderly move higher for many days in the last two weeks but when the market gets a little frothy and when it gets away from whoever wants to buy it at low prices, we seem to sell off on the close. The closing range seems to be “painted” lower. A low futures settlement is nice for an unfilled buy order. We wonder that if there is a large buy order being patiently executed when the VWAP explosion will be. For those of you unfamiliar with the term, Volume Weighted Average Price is the average fill price that the broker does for his client. On big orders these are very important. As a result, especially in equities, many brokers will do their best to make sure the last contract they buy is higher than the VWAP, citing it as proof of a good fill. To keep this simple, if we were patiently buying 20,000 lots for a client and had a 1000 lots left it would be tempting to go to the market with those contracts. We’ve seen this happen before for both silver and gold.

Back to options. Volatility was lower most of the day but went out slightly bid for the back months. Call skew was decidedly lower.

 

Active Options

M 1600 C

Q 1650 C

Q 1600/1750 1x2 C. sprd

 

ATM Volatility Curve:

 

Volatility Smile:

***From NYMEX Settlement

 

End of Day Straddles

GC
	Future	Bid	Offer
M11	1530	46	50
N11	1535	77	81
Q11	1535	99	103
V11	1535	140	144
Z11	1535	170	174
G12	1535	204	208
J12	1540	235	239
M12	1540	262	266

 

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