Gold Consolidation and Low Volatility Continues

December 18, 2019

Gold has been in a gentle consolidation and slight pullback since September 4, 2019. 

Historic volatility (the measure of daily standard deviation over the past month) is at the lowest level since May and implied volatility is near multi-year lows. 

While some may look at this as an opportunity to buy options premium, the reality is that buying low implied volatility does not increase your chances of being profitable, but simply reduces your downside risk of loss. 

I’d rather focus on profit opportunities rather than just reducing risk. 

The long term bullish trend (triggered by September 2019 break of the July 2016 high) is still in tact, but the corrective period puts us in an opportunity for market neutral stance. 

Because implied volatility has a lot of upside, near term options have the most exposure to a rise in implied volatility. The best play for income is intermediate to long term iron condors (90+ days to expiration) with mid to low Delta shorts (.30 to .10) and defined risk longs which are at least 40 to 50 points further out of the money than the shorts. 

Here’s one trade which is mostly neutral with a slightly bullish stance. 

To make this a little more bullish (useful for market event risk hedging and longer term trend following), you can slide down the upper long call by 5 to 10 points. 

Trading below 1460 would be a trigger to get more neutral by widening the CCS (call credit spread) or narrowing the PCS if you want to take less overall risk. 

Above 1500, you could use short term dips (5 point sell-offs intraday) to narrow the CCS or widen the PCS. 

Investors who use Gold as a diversification and hedging position may want to use the lower volatility and the consolidation period to increase closer to full size. Our research indicates that a 5% allocation is about as much as one needs to help offset event risk in the markets.