Goldbug

When I think of a Goldbug, I think of Richard Scarry’s books for kids with the little Goldbug hidden in the pictures.  Sometimes you have to look very hard to find the little guy in the cartoon pictures.  Goldbugs, in the financial markets, are a little easier to find.  They are bidding up gold every time they get a chance.  I have to say, I cannot blame them.  With the printing presses running full tilt in the dollar factory over the last few years, gold has been on a real rocket ship ride. 

This last week, gold rallied heavily on the thought of QE3, and that was a perfectly reasonable reaction to the possibility of more easing.  Just the hint after the rout last week sent the metal soaring.  Our Fed chairman seemed to put the kybosh on the whole thing today by saying he was “standing ready” to take action.  That is not quite the same as actually pumping things up.  Take a look at the chart of the GLD below.  The gold ETF is going through some very volatilize times right now.  I think they are not over.

charts by livevol  (c)  (www.livevolpro.com)

One of my favorite indicators is increasing realized volatility.  The GLD has been making steady gains there recently.  But a quick peek at the term structure has a small anomaly in it.

charts by livevol (c) (www.livevolpro.com)

The June ordinary options are looking a little cheap at 19.6% IV.  They are trading that way because most of the financial world is waiting for the Greeks to vote on June 17th.  In this case, like many names before earnings, some of the spot months get cheap when they are not in the earnings cycle.  The June ordinary options expire before the Greek elections on the 17^th.  That does not mean a big move in the GLD cannot still happen before then.

The Trade

Buy a near the money strangle in the GLD, and hold until Wednesday next week.  Let’s see if the market can do nothing while the nerves get pushed to the edge.  At least traders don’t have to pay up for the holding the contracts.

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