Trade Idea from DB – GLD Calls

We came across an interesting research piece from DB today, All That Glitters is Gold.  DB analysts suggest an options strategy to create exposure to gold prices.  To note, DB is positve on gold prices, reasoning the metal will drive higher by central bank demand and declining faith in paper currency. 

If you are a gold bull Deutsche Bank suggests taking advantage of “skew” by buying upside calls on GLD. From DB:

Unlike  equities,  commodities  tend  to  have  upward-sloping  skew  with  higher
implied volatility for higher strikes.  GLD skew is currently near its highs over the
past  eighteen  months,  suggesting  upside  calls  are  cheap.    Figure  1  shows  the
80-120%  6M  and  12M  skew  on  GLD.   Figure  2  shows 6M  skew  as  of  today’s
close and as of October 7, 2009 close.  Notice that the 90% put traded at similar
implied volatility on both dates.  Since October 7th upside implied volatility has
decreased materially and downside implied volatility has been bid up by investors
seeking  protection.    Investors  who  desire  long  exposure  to  gold  prices  should
consider buying calls on the commodity ETF GLD while upside is relatively cheap.

 

source: Deutsche Bank
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