While the focus of Options Strategy Network is often on Options Liquidity, when one is concerned about initiating an Options Position the analysis must emphasize the Implied Volatility and the Skew of the Options Chain. While most Stocks and Stock Indices have a similar Skew, the Gold Market has a Skew with an Implied Volatility that increases as it gets farther out-of-the money on the Call side. Recognizing these intricacies, and the pricing structure behind them, can enable you to design positions which most appropriately meet your risk/reward requirements.
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. On our website you will find numerous educational tools to improve your understanding of Options Trading.
The Table below includes an analysis of Gold Puts and Calls. Gold’s Implied Volatility Skew, as mentioned earlier, is towards the out-of-the money Calls. While the Implied Volatility of the 1275 Calls is 16.18%, the Implied Volatility of the 1375 Calls is 19.37%. When looking at the Puts, there is a small drop off in Implied Volatility and then it increases as the Gold Puts get farther out-of-the money. The nature of this skew is much different than the second sample we have chosen, Apple. But what does it mean? For one who would like to get Short Gold it means that they can Sell a Call Fence (Sell a Call and Buy a Put) and get comparatively good value. For example, using the Strike Prices listed in green, you could Sell the 1300 Calls which are 64.30 away from the Current Trading Price and Buy the 1175 Puts which are 60.70 away and take in a credit of $1.75. You would have Sold the 1300 Call for a midpoint of the Bid/Ask for 7.35 and Bought the 1175 Put for 5.60. This would enable you to get Short Gold with an Implied Volatility advantage of just over 1%. If it suits your purpose of getting short and you are comfortable with unlimited risk on the upside, this may be for you. It’s the analysis that counts; Gold is trading in the middle of nowhere and you might want to wait until it gets towards the upper end of its range to get Short. For someone who wanted to get Long Gold, purchasing Call Spreads provides good value. Not only would you Buy the Call with the Lower Volatility than the one you are Selling, but the Implied Volatility of Gold is less than the Historical Volatility. The major consideration on all of these trades is liquidity. Unless you are getting good value legging into the trade, you may be giving up too much of an edge to make money in the long run. Contact Us to discuss these issues.
The bottom of the Table is dedicated to Apple Stock (AAPL). The dynamics of the Skew are completely different than Gold. The Puts have considerably higher Implied Volatility than the Calls. This enables traders to establish certain positions with excellent value. In addition, as you can see from the prices taken shortly before Friday’s close, the liquidity in AAPL Options is excellent. The Skew in Apple provides traders the opportunity to get Long or Short with good value. The Long Fence, Buying Calls and Selling Puts, creates an excellent opportunity for one who is comfortable and capable of taking delivery of the Stock if the Market goes lower. For those who are interested in getting short, there is the Short Options Pairs Strategy described in our Options Guide PDF. Due to the Skew, there are a multitude of strategies which can enable traders to establish a position that provides an inherent statistical advantage. It’s still easy to lose money; but the Skew can make things a lot easier. Contact Us to learn about our private Webinar Training Sessions which can bring your Options Trading to another level.
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.