Gold FX Options Strategy

Published on
June 6th, 2017
5 minutes

Gold FX Options Strategy

Trade Ideas ·
Featuring Nancy Davis

Published on: June 6th, 2017 • Duration: 5 minutes

Nancy Davis of Quadratic Asset Management is one of the foremost experts in portfolio construction around options. In this trade idea, Nancy identifies a supply demand imbalance in the options market due to structured products and outlines how to play it.


  • PN
    Paul N.
    7 June 2017 @ 22:37
    Buying Australian gold miners is another great way to play this. Tons of leverage and less complex for average investors. I would add that the Aussie housing bubble is on the brink of collapse with mortgage rates rising substantially on the most indebted households on the planet. We're headed for a depression and the currency should fall significantly over the next 4 years.
    • PN
      Paul N.
      8 June 2017 @ 04:07
      Many of these companies have AISC of $1000-1100 per ounce with XAUAUD at $1700. Printing money.
    • JS
      John S.
      10 June 2017 @ 22:39
      Good idea to play this strategy through Aussie gold miners which provides leverage plus some of them cash rich with high fcfy and pay dividend
    • my
      markettaker y.
      18 August 2018 @ 14:40
      any names to recommend?
  • ps
    pete s.
    24 July 2017 @ 23:14
    xauaud. buy call in xau = long gold/ buy put in aud =aud down. i look at the xauaud chart now and it looks like is down sofar since this video. correct me if im wrong im new?
  • bb
    buck b.
    25 June 2017 @ 02:54
    Picking a currency to plunge is too hard so I have to pass on this one. I just slowly keep adding to gold, silver and miners to hedge investment portfolio. Hopefully on the auto plunge Grant recently talked about will give me a shot at some cheap platinum. That gold chart was crazy in AUD. If Gold and dollar rally together that would trigger some all time highs in other currencies.
  • BP
    Benton P.
    8 June 2017 @ 18:57
    Polling the group... what's the best trading options 101 book out there? I need to get smart on this. It's only going to be more important as the financial system gets more complex and computer driven
    • AW
      Anak W.
      12 June 2017 @ 23:34
      pin this comment.
    • RS
      Richard S.
      13 June 2017 @ 12:27
      The Options Workbook. Anthony J Saliba
    • VS
      Victor S.
      13 June 2017 @ 19:33
      Options as a strategic investment. L. McMillan
    • MT
      Mike T.
      16 June 2017 @ 11:32
      I have a slightly different suggestion in that before you start buying books, signing on for seminars, searching youtube, buying the 'best software', check out the work of Scott Young. It's nothing to do with any form of trading but his insight on how best to learn, to attain deep knowledge on any subject starting from the ground up, could save you a ton of time in the long run I can personally vouch for the Rapid Learn Course, it costs a few hundred dollars but he will give you your money back if after 60 days one decides it not for you. Other than being a subscriber I have no personal association with Scott Young
  • JV
    Jonas V.
    8 June 2017 @ 03:19
    I'm not good with options. Putting in a FX trade short AUD/USD, long XAU/USD would give similar results, correct?
    • JL
      J L.
      8 June 2017 @ 09:55
      Options rookie myself, let me try and lay out the difference. Those FX crosses would be a trade in the same direction. However her main idea is to profit from buying call options on XAUUSD that she has identified as oversold. Those calls give you the right to buy gold until some date at a certain (strike) price agreed today. Generally if an asset is volatile its options will be more expensive as it becomes more likely the strike price gets hit and the seller has to pay out (in this case sell gold to you at a lower price than it is trading). If you judge the volatility in any direction to be larger than the volatility implied in the option price you can consider buying it. As I understand it these trades are often structured to give large payouts with a limited downside, sort of like betting on a 10 to 1 underdog because someone will pay you 20 to 1 odds. I would be very grateful if anyone can recommend some good books on options and in particular strategies on how to adjust the sizing of option trades to volatility. Thanks
    • RS
      Richard S.
      13 June 2017 @ 12:30
      The Options Workbook. Anthony J Saliba
  • SJ
    Sophie J.
    6 June 2017 @ 10:42
    How would you adjust the strategy if you are Australian with $AUD in the bank?
    • JL
      J L.
      6 June 2017 @ 12:24
      happy times, you go and buy gold with them
    • JL
      J L.
      6 June 2017 @ 12:40
      or buying the same set of options if you want to profit from the cheap calls, it would be a cleaner trade to you as you actually already own what you are shorting
    • RH
      Rob H.
      7 June 2017 @ 12:23
      Yep agree, keep it simple and go long gold whilst allowing the AUD to naturally depreciate
    • TM
      The-First-James M.
      11 June 2017 @ 19:36
      Sophie, if you're not comfortable holding physical bullion such as Gold Sovereign coins (which make sense for smaller purchases), maybe have a look at a service such as the Perth Mint. Also, Goldmoney Personal (formerly BitGold - search RVTV for Josh Crumb interviews) make it very easy to purchase small quantities of Gold, and to get both in and out: Also caters for Aussie Dollar Banks transfers and debit card purchases (I say this as an adoptive Australian Citizen who was living there until recently).
    • TM
      The-First-James M.
      11 June 2017 @ 19:37
      Personally, this is a far simpler and less risky approach than taking the options route (I say this as somebody who has never traded options but has a growing interest in using them to express short positions).
  • MT
    Mike T.
    6 June 2017 @ 17:18
    the following comment is NOT related to the thesis itself. I have posted previously on trade ideas expressed through options. To re-state, there will of course be many RVTV subscribers that are fully experienced option traders, but there will also be many who are not, and for the folks that are not experienced, options strategies that are 100% debit in nature can in the wrong hands, still be potential money losers even if the thesis plays out as described and within the time frame suggested. I hesitate to be critical of this wonderful service that is RVTV but trade ideas expressed through options must at the very least provide some detail beyond the thesis, the structure of option position together with commentary on how best to manage the position as time passes by must be included. There is a reason why debit option strategies, even when the underlying thesis is right, can turn out to be losers, the balance of probability is heavily loaded in the favor of option sellers. Further any one considering using options, if they do not have intimate self knowledge of pre-planned management and exit strategies is making a big mistake. Sorry to bore everyone, I've said my piece on the subject, three times now and will not go on about again.
    • JL
      Jinny L.
      10 June 2017 @ 15:22
      Agree as a professional option trader back in the days. Theta decay in both positions sucks.u gotta get the timing otherwise u lose money even if the thesis is spot on
  • ss
    shaun s.
    7 June 2017 @ 20:08
    I believe she likes it all in options so that the loss is defined and that the trade is convex. However I also am lost on how to execute this trade.
  • VS
    Victor S.
    7 June 2017 @ 20:05
    Very interesting. Thank you, Nancy D. Now i have q about details. XAUAUD calls - is it OTC contract? What about exchange traded products?I don't see it on IB or Thinkorswim (.ca). XAU seems to have very thin options chain. I could find GC and 6A contracts to trade option on. How to calculate ratio in between them? I mean how many deltas of GC against how many deltas of 6A? One more q: would the same strategy work with GC calls and ZAR puts? Gold is significant export of S.Africa and they are having some political instability - might work for ZAR puts.
  • FC
    Forest C.
    7 June 2017 @ 19:30
    Just a novice student in the trading game - I do agree with some of the opinion on segment with regards to option play presented, RV need to make someone like Dave Floyd or Peter Brandt to do a option series ! Still it is a good thing to have alternative views on the underlying - this plus Patrick's video makes a good case on the AUD shorts
  • FB
    Fred B.
    7 June 2017 @ 13:27
    Wow, the fact that Nancy , you took the time to clarify your viewers question on your strategy is terrific! This is just one of the many reasons Real Vision is such a great platform and why I re upped for 3 more years! Working for one of those global banks that generate huge profits from all these structured products the clarity of your insight on your being on the other side of this vol selling trade is invaluable . Great interview with Mike Green also. Thank you Nancy!
  • HB
    Heini B.
    7 June 2017 @ 06:47
    Talk about democratizing knowledge wow. Just a tip, don't do the trade if you don't know how to execute.
  • MA
    MarketStudent A.
    7 June 2017 @ 06:05
    Specifically, how can one execute this trade ? Thanks
  • TC
    Thomas C.
    6 June 2017 @ 11:46
    Anyone here explain this in English please ? - way too complicated for my small brain "selling otc thru cash settled note call upside yield vault space" "cash settled notes gold dividends" wooahhh !! Thanks - sorry for not knowing all these Terms anyone have a phd in finance ?
    • ND
      Nancy D. | Contributor
      6 June 2017 @ 14:10
      Hi Thomas, I wanted to respond to your question to explain in more detail. There is supply of gold volatility in non USD crosses from retail structured products. These structured products sell upside calls on gold to “yield enhance” or to “earn carry” on physical gold holdings. This is similar in concept to overwriting that takes place in the equity markets by selling covered calls. Many retail investors sell volatility via structured products to create a “dividend on gold” to cover the costs of their physical vault space. They attempt to generate yield by selling gold call options (as a covered call strategy) denominated in their home currency be it EUR, JPY, CHF or AUD. We specifically like XAUAUD calls (these are calls on gold priced in AUD). I hope that this is helpful. best regards, Nancy
    • AC
      Adam C.
      7 June 2017 @ 06:00
      Had no idea selling calls was so prevalent with physical owners. I get trying to offset your storage costs, but of any asset in the world I don't want to be short upside on... it's gold. Thx for the video.
  • DF
    Dave F. | Contributor
    7 June 2017 @ 00:51
    Good stuff - like seeing different options perspectives. Thanks
  • JG
    Justin G.
    6 June 2017 @ 15:29
    I am confused on the part where she says the AUD behaves like a risk-off asset yet is buying puts on AUD/USD (to benefit from AUD weakness). I am assuming then when she says the AUD behaves like a risk-off asset she means it in a negative way rather than positive ?
    • JP
      Joseph P.
      6 June 2017 @ 21:53
      yes - She means that AUD is sold when "risk off" occurs.
  • RM
    Ricardo M.
    6 June 2017 @ 18:42
    Is this the same as if I go long AUDUSD in forex ? I dont have so much experience in options.
  • CH
    Colin H.
    6 June 2017 @ 18:10
    Great idea
  • AA
    Asaf A.
    6 June 2017 @ 15:32
    FX Options trade OTC.. so how does a retail investor express this? GLD options and spot AUSUSD ?
    • CR
      Chris R.
      6 June 2017 @ 16:19
      Options on the Aussie Dollar trade on futures on the Chicago Mercantile Exchange in the U.S.A Link:
    • CR
      Chris R.
      6 June 2017 @ 16:23
      There is also an ETF, symbol FXA. But the futures would be more liquid (lower costs). However, the futures contract minimum size is $100,000 AUD.
  • SG
    Samuel G.
    6 June 2017 @ 15:03
    Looking forward to a long form interview of Nancy!
  • AG
    Alexander G.
    6 June 2017 @ 14:12
    I personally like selling cash-covered puts and covered calls on gold mining stock ETF's. The implied volatility is pretty high (40-55). The realized vol, of course, also. But if you start with a 50:50 portfolio (50% cash, 50% miners) and write (covered) puts and calls at the same time it will "automatically" make you a) sell your miners at higher prices plus collect both premiums or b) buy more of the miners (which you love anyway) at a discounted price from which you can deduct both premiums, too. Buy low, sell high. Of course, there is no free lunch, and the drawback is that after an extended period of gains you will have sold all your miners (but with nice gains, and you can continue / increase your covered put writing) or you will have spent all your cash on acquiring additional miners after an extended downwards move. In that case you can hold and wait, or keep writing calls (with the risk of losing the underlying in the initial part of a new rally). The value of this strategy comes from the fact that the investor doesn't care if miners go up or down - he will sell at higher prices and buy more at lower prices. You are agnostic on short-term price moves, and the option market pays you for taking this agnostic view. Losses are still possible, of course, but compared with a long-and-hold strategy you will cushion your losses with option premiums earned.
  • TC
    Thomas C.
    6 June 2017 @ 11:46
    Anyone here explain this in English please ? - way too complicated for my small brain "selling otc thru cash settled note call upside yield vault space" "cash settled notes gold dividends" wooahhh !! Thanks - sorry for not knowing all these Terms anyone have a phd in finance ?
    • AG
      Alexander G.
      6 June 2017 @ 14:03
      Hi Thomas, no worries... cash settled = should the option the holder of physical gold in the Swiss vault get exercized he doesn't have to supply physical gold - he can just fork over some cash. Helps if physical gold is really dear to your heart. Storing physical gold costs money. Some investors are greedy and do not want to pay those fees. So some "smart" advisor told them "why don't you sell some call options and make your gold earn some money for you?" Of course, there is no free lunch, and should gold double over the lifetime of the (sold) call option the seller (the guy with the physical in the Swiss vault) would probably shed a lot of tears over missed gains. "cash settled notes" = same thing, just wrapped in a security that looks like a fixed-income instrument (some investors are not allowed to gamble in options, but they can touch structured notes, even if risk exposure is the same). In the end, everybody is cooking with water and there is no magic recipe. Some try to sell filtered tap water. Others think what they bought was water in what later turns out to be nitroglycerin... (when you don't understand the risks of options)
  • JL
    J L.
    6 June 2017 @ 13:19
    I also greatly enjoyed it. Would love to hear her take on the best way to play XAU/JPY
  • SC
    Shane C.
    6 June 2017 @ 12:42
    I love it. I was wondering what people thought about the fact that in risk off situations people flood capital into the US. Obviously, this helps the dollar. The same kind of people obviously still look to gold. So where can you find something negatively correlated to gold and the dollar? Awesome clip guys. I know structured notes are a difficult topic, but if you want to check out them out JP Morgan is working on building a website for retail structured note investors. I believe they have educational stuff regarding the importance of the actual creation of structured notes.