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Tuesday, October 27, 2020
Derivatives Idea – Gold Ratio Collar
*This performance is only observed with historical backtests and not traded by the company.
Risks & Assumptions
- The structure concept is based on combination of derivatives options buying & selling as well as holding long position in gold futures.
- Option prices and the market prices for gold are as of expiry & for representative purpose only. Going ahead, as the market moves in either direction, figures for P & L as well as final payoff will vary based on the underlying prices.
- Initial coupon received as mentioned below is as per the option premiums available at the time of structure creation. This may vary at the time of actual execution based on the corresponding gold market prices and implied volatility.
With markets near make or break levels owing to the upcoming US elections & fresh spike in global COVID-19 cases, precious metal market participants are especially worried about future trend as multitude of factors are now affecting the prices. Gold, often seen as a safe haven hedge, is increasingly trending in much more choppier manner than it was during the start of the year.
With markets hugely expecting gold to rally on back of any sharp correction in equity markets, gold gains could likely be capped by expectations of strong dollar. As seen over the year, investors have increasingly looked to pile up to relative safety of US treasuries during times of sharp market correction. Gold worries have been further compounded by its past rally with lot of investors looking to sell on any spike in gold near $ 2,000 level. This is seen from the gold daily chart which shows tough resistance in $ 1,950 - $ 2,000 zone.
The structure looks to potentially provide downside protection for any drop below 15 % from current levels. On the upside, structure allows partial participation in further gold rally above the upper call strike sell with 50% of positions being open.
|Gold CMP - $ 1906|
|Gold Underlying Price||Structure P & L||Normal Position Buy & Hold at CMP|
|$ 1,000||$ (54,890.00)||$ (181,200.00)|
|$ 1,100||$ (54,890.00)||$ (161,200.00)|
|$ 1,200||$ (54,890.00)||$ (141,200.00)|
|$ 1,300||$ (54,890.00)||$ (121,200.00)|
|$ 1,400||$ (54,890.00)||$ (101,200.00)|
|$ 1,500||$ (54,890.00)||$ (81,200.00)|
|$ 1,600||$ (54,890.00)||$ (61,200.00)|
|$ 1,700||$ (40,890.00)||$ (41,200.00)|
|$ 1,800||$ (20,890.00)||$ (21,200.00)|
|$ 1,900||$ (890.00)||$ (1,200.00)|
|$ 2,000||$ 19,110.00||$ 18,800.00|
|$ 2,100||$ 39,110.00||$ 38,800.00|
|$ 2,200||$ 55,610.00||$ 58,800.00|
|$ 2,300||$ 65,610.00||$ 78,800.00|
|$ 2,400||$ 75,610.00||$ 98,800.00|
|$ 2,500||$ 85,610.00||$ 118,800.00|
|$ 2,600||$ 95,610.00||$ 138,800.00|
|$ 2,700||$ 105,610.00||$ 158,800.00|
|$ 2,800||$ 115,610.00||$ 178,800.00|
|$ 2,900||$ 125,610.00||$ 198,800.00|
|$ 3,000||$ 135,610.00||$ 218,800.00|
|$ 3,100||$ 145,610.00||$ 238,800.00|
The structure involves purchase of 2 lots of Gold February’2021 Futures at current market price as well as purchase of 2 lots of Gold February’2021 Put Strike 1630 while simultaneously selling 1 lot of Gold February’2021 Call Strike 2165.
Advantages over Normal Position Buy & Hold
As seen from the above structure design, along with downside protection, the structure aims to potentially provide the client with the opportunity to also participate partially in further upside swings beyond the short call strike. The structure can be net coupon paying one with potential to receive $ 3.10 per ounce of gold. This corresponds to roughly 0.65% on annualized basis (Coupon calculated without leverage and based on current market price).
*Past performance is not indicative of and does not guarantee future results. Trading in markets may involve loss of capital.
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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