Trading Gold (XAU/USD) Volatility
The People’s Bank of China (PBOC) has devalued the Yuan guiding rate to lower levels against the US dollar this resulted in currency depreciation across Asia. The move came amid the growing concerns over China's slowdown, the second largest economy in the world, in an effort to encourage exports once again.
Coinciding with China's move, gold (XAU/USD) has been rallying and trading has been volatile. The initial move was triggered on Monday by the Fed's Fischer and Lockhart’s comments which have disappointed speculators with no hint towards the anticipated September hike. The shiny metal closed at $1,105 that day. During the Asia session on Tuesday, the news on the PBOC move caught everyone by surprise and triggered USD buying, sending XAU/USD back down. The fact that China is a top consumer of gold responsible for nearly a third of global demand has also put pressure on the price.
The rally in gold is assumed to be over USD weakness on renewed concerns regarding a delay in the US September interest rate hike. In addition, it is possible that private investors and companies in Asia are seeking the metal as a safe haven due to concerns over China's economic slowdown.
The graph below represents the trading of gold over the past week.
It appears that market news is causing volatility in either direction. Given this and the uncertainty in the near future, you may place a trade in the options market in order to limit your risk and at the same time trade a highly leveraged position.
Currently, the expected volatility for XAU/USD over the next week is approximately 0.85% per day. This level of volatility is not high relative to recent levels and a jump in expected volatility will not come as a surprise.
If you believe that the volatility in the next week will rise you may want to purchase options (Calls or Puts). An option's price increases as volatility increases hence through buying options you are also buying volatility.
You will need to determine your market direction expectations (up, down or even both!). If you believe gold will rally, you may buy a Call option because a Call gives you the right to buy the asset at a given price (the strike) until expiry hence you will profit when the market rises. If you believe gold will decline, you may buy a Put option because a Put gives you the right to sell at a given price until expiry. And lastly, if you expect the market to move but you have no view on direction, you may buy a Call and Put at the same time and simply benefit from an increase in volatility either way.
Below is an example for a trade based on the expectation that volatility will increase (in either direction) in the coming week: The pair is XAU/USD, to buy a Call and a Put both for 10 ounces, both with strike rates equal to the current market rate (at-the-money) to expire in 1 week. The cost of this position is 229 USD (206 EUR). This strategy may create profit if XAU/USD trades in either direction, up or down.
From the Scenarios button you can view the position's profit or loss over a range of gold prices on expiry (in 1-week's time), this is shown in the image below. Notice, if the price of gold moves up or down by $45 within 1 week, you will profit by 100% and if gold price does not out of a $1095 - $1141 range you will lose. Loss is limited to 206 EUR open premium.
Practice trading and check-out profit scenarios on the optionsReasy web-platform.