Commodity Options Report January 14, 2020

No significant changes from our last report. Here is an update on directionality and volatility.

Gold 

Trend: Bullish from Summer 2019 breakout 

Intermediate momentum: Bullish confluence with long term trend 

Short term momentum: Pull back and consolidation provides a lower risk re-entry opportunity. 

HV: The spike in realized volatility has subsided 

IV: The backwardation of options implied volatility has resolved back to contango indicating short term stability. 

Target volatility: The one-month annualized real volatility of Gold still indicates that this is a higher risk time and positions should be smaller than normal. Target allocation is only 13% of total size, one of the lowest readings of the past several years.

Bottom line takeaways for Gold: 

  • Re-entry window for bullish positions
  • Portfolio positions with GLD long shares at reduced size (less than 2-4% of a portfolio)
  • Put credit spreads in /GC futures options with 90-120 DTE, short Deltas between .10 and .20, long strike set to create at least $250 of credit per spread, absolute risk to be a small fraction of one’s portfolio. Scale out of credit spread losses between 1520 and 1480. 

Crude Oil 

Trend: Sideways (currently around the same level as March 2019)  

Intermediate momentum: Bullish toward the top of the range

Short term momentum: Pull back into the middle of the range. 

HV: Realized volatility is fluctuating around normal levels 

IV: Implied volatility remains slightly above long-term levels. 

Target volatility: 

Bottom line takeaways for Crude Oil: 

  • Holding both Put credit spreads and Call credit spreads to maintain directional-neutral stance
  • 93 to 155 DTE 
  • Separately managed credit spreads (stop loss when down 2x the credit received, profit target at 70% to 90% of credit received).