FMX | Connect (Reported 7/14/2011)
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
August Gold settled at $1589.30 per troy ounce, a gain of $3.80 for the day.
Market Recap:
Federal Reserve Chairman Ben Bernanke backpedaled from remarks yesterday alluding to the possibility of a QE3, perhaps discomforted by the market’s reaction. Commodity markets rallied, pundits railed about inflation and the general wisdom of the move came under intense scrutiny. Negotiations surrounding the debt ceiling showed little progress and ended with a confrontation between President Obama and House majority leader Eric Cantor.
Gold opened higher, establishing new nominal all-time highs in overnight trading. Profit-taking dictated much of today’s directional activity, with every move to 1595 in the underlying bringing in a fresh wave of profit-taking. Gold dipped just below 1580 on the lows but closed up almost $4 on the highs, clinching July’s extraordinary run from $1486.80 on July 5th to where we are today (July 1st was a down day).
In options, the 1600 strike was liquidated in almost every month, especially in August, where over 5,000 lots traded. Speculators liquidated calls in August while dealers sold 1600 straddles in October. Volatility started off firmer, and quickly stabilized, even in the rally, but for the first half of the day, call skew firmed up even more. From front to back, skew traded as follows: September was offered, October was back and forth, and December calls were bid. The last third of the day saw call skew collapse. As futures came off the highs in an orderly fashion, October and December 1600-1800 calls were sold aggressively. We in no way think skew is undervalued at these levels. It would seem that GLD’s influence is reasserting itself, starting with the September contract. One other item to note: When calls started getting bashed the bids in October dried up but there are still buyers of December options at a price. For example, the December 2000 Call traded at a price of 4.80 500 times after skew had been crushed.
Directional Commentary: Options: If yesterday was an accurate tell that predicted a rally, today’s activity near the close has made us much less bullish. There’s nothing bearish to say except that the market in options had a minor pullback after making a new high, but in this pullback calls weren’t bought, they were sold. This may just be a pause on the way to more aggressive buying but it feels like you should take some profits if they are in the form of options. We think the next move higher will be greeted with two-way options activity, as opposed to the buying frenzy we saw last week. Conclusion: Neutral/Bullish
Technical: Although stochastics confirm today’s rally as genuine they appear to be rolling over and we would not be surprised to see a pullback in the near future. Yesterday we predicted a move to new highs and a continuation of the rally to the 1600 strike. We expect the move higher to continue, although decreasing open interest at the 1600 strike will be an issue. Aggressive selling near today’s highs suggests we may see a short-term pullback soon, but we think this rally has farther to go. Above 1600, we would look towards 1635 and the top of our trading channel (see our illustration from yesterday) as the next high before this happens. Today’s activity was much more orderly than trading has been the past week and we would not be surprised to see a return to range-bound trading. Looking towards the downside we see support at the 1580 and then the 1550 area. A return to below the 50-day moving average (1522.50) would prompt more bearish sentiments. Conclusion: Mildy Bullish
Active Options
Q 1600 C
U 1650 C, U 1800 C
V 1600/1700 C. spread
ATM Volatility Curve:
As of 4:00 P.M.
Volatility Smile:
***From NYMEX Settlement
End of Day Straddles
| GC | | | |
| | Future | Bid | Offer |
| Q11 | 1590 | 34 | 38 |
| U11 | 1590 | 71 | 75 |
| V11 | 1590 | 96 | 100 |
| X11 | 1590 | 116 | 120 |
| Z11 | 1590 | 135 | 139 |
| F12 | 1595 | 153 | 157 |
| G12 | 1595 | 170 | 174 |
| H12 | 1595 | 185 | 189 |
| J12 | 1595 | 203 | 207 |
| K12 | 1595 | 219 | 223 |
| M12 | 1595 | 232 | 236 |
As of 4:00 P.M.
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