Gold Move Leaves Traders Confused
Gold plummeted near 4% in a brief low liquid market during the Asia session. The bottom was around $1087, levels not seen since March 2010.
Current talks are suggesting the drop was speculative and severe due to the low liquidity of that hour of trading. The at-the-money overnight volatility had risen nearly 100% from 13% to 24.3% as of 09:30 GMT today.
Options trading gives you the ability to trade volatility and not only the direction of the market. With volatility in gold prices rising significantly since the open of the Asia session, you may choose to sell volatility through selling options or you may embrace volatilty and buy options to trade an expected big move in the price of gold.
Trading a decrease in volatilty
If you believe gold will stabilize and volatility will decline, a popular strategy for this outlook is selling a straddle. A straddle consists of selling a Call and a Put on the same strike (target rate), duration and amount. The image below is an example, both the Call and Put have strike $1115, expiry Friday 24th July (4-days) and amount 100 ounces.
The Scenario graph and table below describe the profit and loss over a range of XAU/USD rates at expiry. This strategy relies on the gold expiring near the strike rate. It will return a profit if gold expires between $1101 and $1128 and maximum profit of 1,371 USD is made if gold expires at the strike rate $1115 (as highlighted by the blue box below). On the other-hand, if gold moves out of this range the strategy will lose which will require you to manage your margin at risk correctly.
Trading an increase in volatility
If you expect gold to become more volatile you may trade the opposite strategy through buying a straddle. This consists of buying a Call and Put on the same strike, duration and amount. The image below is an example, both the Call and Put have strike $1115, expiry 4-days and amount 100 ounces. This strategy relies on gold moving significantly UP or DOWN by expiry.
Below is a Scenario chart and table for this long (through buying) straddle. Profit is return, by expiry, if gold falls below $1094 or rises above $1135. If gold expires within this range then a loss is made with maximum loss made if gold expires at the strike $1115.
You may use the optionsReasy platform or Options on MT4 to trade the above strategies.