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