Since April 4, 2016 and the June Gold Contract’s close of $1217.00 the market has rallied more than $40.That’s a 3.4% move during the period. In the same period, the E-mini S&P has declined by 1.4% and Crude Oil’s June Contract has risen from a close of $36.82 to $41.74 at Monday’s close. That is a monstrous increase of 13.4%. The move includes all of the talk about OPEC that I had been hearing about on CNBC. While Crude Oil and Gold look as though they may be a bit overbought, the question is where can you locate an Options Transaction, with good value, to meet your risk/reward parameters?
The best position trades of Implied Volatility Value are usually found in the E-minis where one can effectively use the Skew to establish a position which meets their directional bias. The reason for this is that the E-mini provides the largest Implied Volatility Skew available in liquid markets. Unfortunately, neither Gold nor Crude Oil, at the present time, provides outstanding opportunities to use an Implied Volatility Skew to help create a strategy with significant value. As an example, I have provided an assortment of information about June Gold Options taken just after 4PM ET on Monday. It will give us an opportunity to examine some Options Values and determine whether someone with a Long or Short Trading bias is interested in establishing a position in Gold.
The Table provides Strikes, Bids and Offers and Greeks for both Calls and Puts. I have illuminated the $1200 Puts and the $1325 Calls for comparison. While the Bid/Ask Spread of both Options is 30 cents, the Bid/Ask percentage spread for the Call is less due to the asset value. You should always evaluate liquidity as a percentage of the Bid/Ask Spread. A quick evaluation reveals that the Call is $67.10 or 5.33% from the Current Futures Price while the Put is $57.90 or 4.6% from the Current Futures Price. This quick analysis of Options reveals the disparity of pricing due to differential Implied Volatilities. The $1200 Put’s Implied Volatility is almost 1.75% less than that of the $1375 Call. That accounts for being able to Puchase a Put substantially closer to the current trading price of the Futures Price than the Call which is farther from the Current Price, for a lesser price.
The Table below provides a snapshot for traders to evaluate Options Pricing to determine an Options Trading Strategy which meets their market perception. In the example shown, if you want to get Short Gold through Gold Options, consider the following factors: 1) it has a 9-Day Relative Strength Index on the bottom right of 70.5, 2) the Historical Volatility of Gold for the past 20 days is 20% and although the Implied Volatility of Gold Options compared to the underlying is low, an Options Trading Strategy which Sells the 1325 Call and Buys the 1200 Put for a Credit is not a bad opportunity for someone who is interested in getting Short the Gold Market. Keep in mind this strategy has unlimited risk. This is just one example in one market. The key is to use a similar technique whenever you are evaluating a potential trade. In this particular analysis, if you want to get Short Gold, the Short Fence (Selling a Call and Buying a Put) may be right for you.
At Options Strategy Network our goal is to help Individuals and Corporations design positions that meet their risk/reward requirements by enabling them to build appropriate positions through the analysis of liquidity, historical and implied volatility, the skew and the best options strategy to meet their goals. Contact us to structure a program that meets your individual or corporate requirements. Our thirty years of trading and risk management experience can be an excellent addition to your skills.
OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.