Roaring Gold
Equities are going to finish with a tough week. The specter of Egyptian unrest, higher interest rates and the Fed tapering was enough to pull stocks from their lofty highs. I will say the reasons for the last two mean that the economy is getting better which should be good in the long run. In the short term the market has sold off 3-4% on the Tapering Boogeyman, so the selloff is not a total surprise.
What did not sell off this week were Gold and the Gold Miners. The metal and the peripheral stocks had a big run which most traders are attributing to short covering. The headline inflation came in at the number at that was enough to scare the gold shorts into covering. That also drove the IV up. Looking at the realized volatility landscape notice the Metal and Mining stocks. Gold miners dominated the front of the pack on size and speed of move relative to the market.
I am not calling the near term top in gold, but watching markets move like this when money piles in so fast, the move is usually hard to sustain. Look at the small cap miner ETF, GDXJ. The IV is coming in a bit today all across the upside of the curve which means some profit taking in options.
The whiff of inflation does not inflation make. Judging from Treasury bond prices, the market is not looking for lower rates and is expecting some kind of reduction in Fed buying. That should hurt gold in the short term but I would not short it. A trade that could work is a ratio call spread that would buy just OTM calls and sell a few extra OTM calls farther up the curve. The spread should return a small credit if gold stops or produce a decent return if there is some more run.
Be careful of the margin requirements of any extra short calls.
I have positions in gold.
OptionVision™ – data from ORATS
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