Defensive Safe Haven May Be Seen Using Steep Gold Call Skew
(Bloomberg) -- Gold volatility remains relatively anchored while call skew stays elevated, boosting the appeal of using spreads for upside exposure amid renewed focus on tail risks, given many investors remain long risk in the late-cycle environment.
- Gold continues to provide diversification for portfolios and has been the most volatile relative to havens of 10-year Treasuries and yen, see chart here
- Short-dated implied volatilities continue to trade below their 1-year medians with 50-delta 3- month GLD ETF at 12.3%, 34th percentile
- See chart here of GLD three-month 25-delta call skew, the spread between 25-delta calls and the ATM implied vols, which remains relatively steep, boding well for call spreads
- There is no alternative (TINA) is still working for stocks, given bond yields still lack strong competition vs dividend yield
- However, while stretched U.S. equity valuations don’t exhibit short-term signaling ability, longer-term return prospects have significantly diminished with the S&P 500 trading at 18.7x forward EPS, levels not seen since the tech-stock bubble
- NOTE: See example structure here from July 14 on how receiver spreads may appeal to investors looking to hedge geopolitical risks that game theory suggests will ultimately not lead to conflict, as well as the evolution of the Fed’s reaction function from rate hikes to reliance on balance- sheet reduction for policy normalization
- NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins
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