Aqumin just finished a successful run in New York City at the FinTech Innovation Lab sponsored by the New York City Investment Fund and Accenture with some of the larger investment banks (see this link: http://gigaom.com/2011/07/22/fintech-start-ups-wield-data-and-smarts/ or search for Aqumin FinTech Innovation Lab). It was a great opportunity to grow the company and we started pilots in several of the top banks. The idea is you use Aqumin technology to look for things that are not readily apparent and control risk or trade appropriately. The example below with the Gold Stocks is a case in point.
Panning for Gold
The Debt Crisis is getting all the headlines. The last time I checked Uncle Sam still generates enough revenue to cover interest payments. Perception scares the market and in the current climate the debate causes anxiety that is still too fresh in everyone’s memory. Market participants are a little spooked, so gold prices continue to make all time highs. That is headline news. I have a standard view that looks at 3 Month Implied Volatility against the 2 year lows of 3 Month Implied Volatility. Generally I care when that number gets to within 10% of its two year low. The view below is just a snapshot of that result.
The height of each equity building is the one day price change. Note yesterday had some activity but what I wanted was a place where current movement was not affecting implied volatility. A collection of red buildings have longer term 3 Month Implied Volatility trading within 10% of their two year lows. I was mostly interested in a larger group of names (lots of flat, red buildings) to see if any particular sector was in the volatility basement. To my surprise much of the Metals and Mining GICS Industry Names were there. Mainly the Gold Miners and Steel Producers filled the bottom. This surprised me.
When implied volatility gets very low on a longer term basis, the market is usually taking out one side of the equation. Can the price of gold keep going up? Is the Debt Crisis really a Debt Crisis? You would think with all of the near panic these levels in the Gold Stocks would be much higher. Also, I concede a run up in the names automatically pushes the Implied Volatilities down. But a crisis would spur a greater flight to Gold and the longer term implied volatility says no. So what to do? Standard trading practice says when implied volatility is cheap you buy it. In the current case with the Gold Stocks you simple buy volatility as an asset. A combination of Delta Neutral calls and puts in the farther out months generally would do the trick on a few select Gold Stocks. This way you hedge both the “Debt Crisis” and possible slide in Gold should the dollar start to regain value through the miracle of fiscal responsibility. Buying Gold Stock Volatility at near bottom prices means you don’t have to spend much for the privilege.
FYI- the GLD and GDX ETFS’ are trading 19% and 14% of 3 Month Implied Volatility two year lows.