METALS #16(c) – Taking Stock of the Pt-Pd-Au relationship (contd.)

18th December 2023

OPTIONS STRATEGY (this is a reposted section from Metals #16(b))

1. I will be using April 2025 options on Pt and Au; September 2024 Options on Pd.

2. Structure size will be 3xPt:1xAu:2xPd.

3. Platinum: purchase the April 2025 40 delta call (300 lots); sell the April 2025 25 delta put (300 lots) .

4. Gold: purchase the April 2025 25 delta put (100 lots).

5. Palladium: sell the September 2024 36 delta call (200 lots).

OPTIONS STRATEGY – DETAILS

A. Strike prices and premiums (15th December close)

A.1. Gold: Buy 100 April 2025 1,965 put (expiry 26 March 2025) – premium = 61.50. Reference = 2,153.30. Implied Vol = 15.01%

A.2. Platinum: Buy 300 April 2025 1,070 call (premium = 67.40) and sell 300 April 2025 870 put (premium = 44.90) (expiry 19 March 2025). Net premium = 22.50 (x3). Reference = 986.00. Implied Vol = 23.45% (call); 22.78% (put).

A.3. Palladium: sell 200 September 2024 1,390 call (premium = 75.00) (expiry 21 August 2024). Reference = 1,218.80. Implied Vol = 34.34%.

Net Premium (negative = outflow; positive = inflow):

Gold = -61.50

Pd = +150.00

Pt = 134.70 – 202.20 = -67.50

Net Premium Taken in = 150 – 61.50 – 67.50 = +21.00

POSITION SUMMARY

1. Net Delta: if we apply the size of the positions as weights to the delta of each of the 4 options, the net delta number is -1.5 (practically neutral). However in practice this is but a math exercise. Au is positive delta (increasing as Au prices decrease and vice versa). Pt delta is net positive of 15.37 (increasing as Pt prices increase and vice versa). Pd delta is a negative of 36.39 (increasing as Pd prices increase and vice versa).

2. Net Gamma: being long-dated options, gamma at this stage is irrelevant. The numbers are miniscule as to be nearly gamma neutral.

3. Net Vega: summing up all the positions and using position size as weights gives the whole structure a long vega position (net) of 2.3431. But the single largest vega position is Au being positive 7.587. Pt is net positive vega of 2.1885. Pd is negative vega of 7.4324.

4. Net Time Decay: net positive of 0.3083 after applying position size as weights.

Time to play!

1. This Pt-Pd-Au option structure will be monitored via a new post every Friday close of the week… unless the market goes nuts and a review mid-week is deemed necesssary.

2. In the meantime the next post will be an FX one – most likely USDJPY (my favourite). The last time I posted about dollar JPY was back in 7 June 2020 (https://mantaoilco.com/fx-post-no-1/).

Metals and Energy post gold-oil ratio derivatives trading

Anytime…Anywhere.

OPTIONS STRATEGY – DETAILS (contd.)

B. Option Greeks

B.1. Delta

B.1.1. Gold 1,965 put = 25.26

B.1.2. Platinum 1,070 call = 40.80; 870 put = 25.43

B.1.3. Palladium 1,390 call = 36.39

B.2. Vega

B.2.1. Gold 1,965 put = 7.5870

B.2.2. Platinum 1,070 call = 4.192; 870 put = 3.4625

B.2.3. Palladium 1,390 call = 3.7162

B.3. Time Decay (Rho)

B.3.1. Gold 1,965 put = 0.0541

B.3.2. Platinum 1,070 call = 0.181; 870 put = 0.0514

B.3.3. Palladium 1,390 call = 0.3756

B.4. Gamma

B.4.1. Gold 1,965 put = 0.0009

B.4.2. Platinum 1,070 call = 0.0014; 870 put = 0.0012

B.4.3. Palladium 1,390 call = 0.0011

And the winner is ……….

RISK ASSESSMENT

1. The main risks are the open position of short Pd 1,390 call and the short Pt 870 put. But these should be mitigated by the cointegration between Au, Pt an Pd. Regardless, worth monitoring closely

2. No risk of time decay if market remains dull. In fact, the structure will benefit from little to no movement.

3. Vega risk is minimal since Implied Vols are already at their historical levels. However, need to monitor the change in the vega position as the market moves (gamma of vega or Vanna).

4. Gamma risk is negligible….for now.

5. Finally, the risk of improper sizing of the structure. The size was dictated by the statistical studies made and is dependent on mean reversion and Beta coefficients to work properly. This may not be the case. As always, need to monitor closely.

Weekly – Platinum

Weekly – Palladium

Weekly – Palladium-Platinum

Weekly – Palladium/Platinum (ratio)

MyDVICE