Wednesday, October 13, 2021
Gold stuck in a range before FOMC Meet
By Century Financial in 'Investment Insights'
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Capitalize on it with Short strangle
Gold has been stuck in the mid 1700’s as investors weighed the implications of weaker-than-expected U.S. jobs data and surging energy prices on the timing of the Federal Reserve’s decision to begin reining in stimulus.
Worries about stagflation amid surging energy prices is supporting the safe-haven demand for gold. Meanwhile, prospects of early tightening continue to cap the upside for gold. Although the headline NFP number was disappointing, the unemployment rate fell to 4.8% from August level of 5.2%. This is important as it closes in on the Fed’s target of 4.0% for full employment.
As a result, market participants expect the Fed to proceed with a tapering of bond purchases in coming weeks. The markets have also started pricing in the possibility of an interest rate hike in 2022 and this was reflected in elevated treasury yields. Benchmark 10-year treasury yields currently trade above 1.60%. The focus now shifts to US CPI print due on 13 October 2021 which could bring in some volatility for the metal. However, of key importance will be FOMC meet due on 2nd-3rd November to gain more clues on Fed’s tapering timeline. Until then gold is expected to continue its range-bound movement with a bearish tilt as treasury yields climb higher. Technically, the recent high of $1781 can be used as a threshold by the bears. The next strong resistance area will be near the $1800 mark as it surrounded by 200- & 100-day MA. On the downside the metal needs to break below $1745 to target $1720-30 region.
With the above in mind, Short strangle option strategy with Oct 29th expiry can be deployed to capitalize the range-bound movement in gold ahead of the FOMC meet due on 03rd November 2021.
The short strangle strategy involves shorting a put option at $1720 and shorting a call option at $1805. The strategy can be profitable if gold trades between $1706 and $1819 and potential maximum profit would be the net premium received of $1410. Below $1706 & above $1819, the strategy can look to incur losses.
Short Strangle: Nov 21 Gold Futures
1 Lot = 100 units; Expiry: Oct 29, 2021 | |||
Direction | Option Type | Strike Price | Premium Received |
Short | Put | 1720 | $8.20 |
Short | Call | 1805 | $5.90 |
Total premium received | $14.10 | ||
Initial Margin Required (Approximate Amount - may vary with final premiums) | $14050 | ||
Max Profit | $1410 | ||
If gold trades between $1706 and $1819 | The strategy can be profitable with potential max profit capped at $1410 | ||
If gold falls below $1706 or rallies above $1819 | Potential Losses will start getting accrued and will be incremental in nature |
Source: Bloomberg
Payoff
Gold price | Strategy Payoff |
$1,675 | ($3,090) |
$1,685 | ($2,090) |
$1,695 | ($1,090) |
$1,705 | ($90) |
$1,715 | $910 |
$1,720 | $1,410 |
$1,740 | $1,410 |
$1,750 | $1,410 |
$1,780 | $1,410 |
$1,800 | $1,410 |
$1,810 | $910 |
$1,840 | ($2,090) |
$1,850 | ($3,090) |
Data source: Bloomberg
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data as of: 13/10/2021
Arun Leslie John
Chief Market Analyst
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