GOLD FACES THE GAMMA PROBLEM

 

“Well, she does have a point!”

Gold suffers from the same problem as stock indices, and that is the options 

market is “bigly & yuge” compared to the underlying financial derivatives like 

futures and CFD’s. So, to review, 𝚫 (delta) is the rate of change of a call/put as 

the underlying [futures] trades higher/lower. By definition an ATM [At the 

Money] call is priced at 0.50, meaning if gold futures and/or spot rallies $3, the 

ATM call most likely rises about $1.50, given stable volatility … 𝜸 (gamma) is 

simply the rate of change of the delta.

Here’s the problem … as markets move to the upside, and especially to the 

downside rather quickly, those hedge funds & other large traders who are 

short calls/puts that are OTM [Out of the Money], suddenly become ATM or 

ITM [In the Money] … as such, their deltas rapidly charge higher, and since 

it is usually accompanied by a boost in volatility, the OTM options very 

quickly start skyrocketing in price … and of course, the large short positions 

got some serious losses to now cut … so how do you correctly do that without 

creating a bigger problem? … EASY PEEZEE; “if on the upside, you are 

forced to buy the underlying no matter what … if on the downside, you are 

forced to sell the underlying no matter what … delaying, or waiting for some kind 

of correction, can lead to even bigger losses and maybe even a funds liquidation”.

And right now, having seen gold not do Mr. Jack Squat for years on the 

upside, outside of little rallies here and there, now suddenly within 5 - 8 

weeks, there is a “sea change” in market sentiment thanks to the FED, not 

only stopping the rate hikes, but looking very much like the “CNTRL-P” is 

getting ready for QE∞ … add to that the fact that China is “buying” and 

adding to physical, and you’ve basically got a market with its pants on fire 

short calls up to their eyeballs … and that simply means no deep corrections 

until they are collectively finished … at that point, the banks [read the 

ChiComs] hand them their asses on a plate.

What we really need to see is an expansion of gold’s range, not only in New 

York, but daily as well … this less than $6 - $7 range coming into the U.S. day 

stinks, and the action lately in New York, although it has picked up slightly, 

has been dismal to say the least. Add to that, the market is getting way ahead 

of itself, especially with the Mrs. Wantanabe & Gal Pals and other Asian 

traders, who for the first time in years, their buying in Asia sees further buying 

in Europe, and then very little happens in New York … rinse, repeat, and 

they’re absolutely giddy with profits instead of the usual losses … “well, how 

long is this gonna be allowed to continue before the inevitable BOOM! lower in 

price that you know is coming”?

Another “Flying Wedge of Death” [FWD] day, inside a relatively tight range, 

with trading conditions less than ideal [understatement of all time], which 

isn’t helped by Turnkey’s spreads which are starting to become onerous 

… anybody but me remember 7 - 11 cent spreads all day long? 

No trades in the PAMM today, simply cuz of the very tight range with nothing 

happening … this market needs to see some downside action. Onto tomorrow 

… until then mi amigos … Onward & Upward!!

Have a great day everybody!

-vegas

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