Magazine article Modern Trader

High on Low Gold Volatility

Magazine article Modern Trader

High on Low Gold Volatility

Article excerpt

High on low gold volatility Futures markets which trend slowly for long periods of time often disappoint the futures options traders who have bullish or bearish opinions.

An option buyer who identifies the trend direction correctly can still lose on the trade.

Profitable options strategies require assessments of market volatility as well as direction. Markets with very low volatility are generally unprofitable for someone who simply buys puts or calls. However, low volatility markets can provide excellent opportunities for those willing to put on option spreads involving several strikes.

Various strategies can be employed based on the trader's assessment of the probability of different outcomes. These assessments should reflect historical correlation between the price of the underlying futures contract and the volatility of that futures.

Gold futures provide a good illustration. Gold futures prices and the volatility of futures prices are positively correlated -- that is, gold price movements are more volatile when the price is high than low. For this reason, the precious metal is very volatile in bull markets and much less so in bear markets.

Gold prices can drop sharply in a short period of time. However, this usually occurs only right after a sharp upward movement.

Gold price volatility declines significantly once prices have been in a bear trend for a year or so. Further declines consists of slow drifts rather than sharp drops. …

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