In association with

Market Bulletin 31st March 2010

How to profit from Gold volatility while stock and

bond volatilities are falling.

2010 so far has proven to be a tricky year across most asset classes for options
traders. But one major exception to that has been Gold which has provided some
very interesting trading opportunities.

Both equity and bond markets have fluctuated considerably especially intraday. However,
these intraday movements have not affected implied volatility levels. In fact, implied
volatility in both bonds and equities has fallen since the start of the year. Gradually falling
implied volatility is exactly what option traders hate as it makes buying options not very
worthwhile as the low volatility and the time decay destroys the value of the options and the
risk reward is just not there for selling options short.

Below are three charts showing what has happened to volatility since the start of the year
for gold, equities and bonds. The VIX Index is an index representing implied volatility of the
S&P500. The MOVE Index is an index compiled by Merrill Lynch that follows the implied
volatility of the US bond market.

Gold Volatility Vix Index

29 29

27 27

25
25
V
I
X 23
23
L
e
v 21
21 e
l
19

19

17

17

15
31/12/2009
02/01/2010
04/01/2010
06/01/2010
08/01/2010
10/01/2010
12/01/2010
14/01/2010
16/01/2010
18/01/2010
20/01/2010
22/01/2010
24/01/2010
26/01/2010
28/01/2010
30/01/2010
01/02/2010
03/02/2010
05/02/2010
07/02/2010
09/02/2010
11/02/2010
13/02/2010
15/02/2010
17/02/2010
19/02/2010
21/02/2010
23/02/2010
25/02/2010
27/02/2010
01/03/2010
03/03/2010
05/03/2010
07/03/2010
09/03/2010
11/03/2010
13/03/2010
15/03/2010
17/03/2010
19/03/2010
21/03/2010
23/03/2010

15
03/24/10

03/22/10

03/18/10

03/16/10

03/12/10

03/10/10

03/08/10

03/04/10

03/02/10

02/26/10

02/24/10

02/22/10

02/18/10

02/16/10

02/12/10

02/10/10

02/08/10

02/04/10

02/02/10

01/29/10

01/27/10

01/25/10

01/21/10

01/19/10

01/15/10

01/13/10

01/11/10

01/07/10

01/05/10

01/01/10

Date

Source: Bloomberg Source: Bloomberg

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.
 In association with

MOVE Index
110

105

M
O
100
V
E

95
I
n
d
90
e
x

85
L
e
v
80
e
l

75

70
31/12/2009
02/01/2010
04/01/2010
06/01/2010
08/01/2010
10/01/2010
12/01/2010
14/01/2010
16/01/2010
18/01/2010
20/01/2010
22/01/2010
24/01/2010
26/01/2010
28/01/2010
30/01/2010
01/02/2010
03/02/2010
05/02/2010
07/02/2010
09/02/2010
11/02/2010
13/02/2010
15/02/2010
17/02/2010
19/02/2010
21/02/2010
23/02/2010
25/02/2010
27/02/2010
01/03/2010
03/03/2010
05/03/2010
07/03/2010
09/03/2010
11/03/2010
13/03/2010
15/03/2010
17/03/2010
19/03/2010
21/03/2010
23/03/2010

Date

Source: Bloomberg

These charts show how volatility has generally fallen except for gold.

So while it has been difficult to implement profitable option trades on both equities and
bonds option trades on gold have proved quite profitable and we believe there are still
opportunities for more profitable trades to be made.

An example of an options trade on gold which Seven Days Ahead recommended on the
11th February 2010 when the June 2010 gold future was trading at 1082 was to go long
gold using the following option structure:

Buy put strike 1005 expiry June 2010

Sell put strike 1075 expiry June 2010
Buy call strike 1090 expiry June 2010
Sell call strike 1165 expiry June 2010

The above structure fitted very well into a limited risk option trade strategy given that there
was a defined maximum loss of USD6.49 should the gold price fall dramatically.
The payoff of the structure at the time:

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.
 In association with
P&L of Structure at Expiry
10000

8000

6000

P 4000
/
L
2000
i
n
0
U
S
D -2000

-4000

-6000

-8000
950 963 976 989 1002 1015 1028 1041 1054 1067 1080 1093 1106 1119 1132 1145 1158 1171 1184 1197

Underlying Gold - June 2010 Future Price

Source: Bloomberg

The structure in itself was very interesting because 1 option per leg implied the investor
actually received cash up front (USD5.1) i.e. the premium was negative.

Following a good rally in the gold price we closed the trade on 3rd March with a closing
price of USD26.6 making a profit (not including any brokerage or other costs) of USD31.70
(USD -5.1 + USD26.6 = USD31.70). If an investor had allocated 1% of his total portfolio to
this trade the result on the total portfolio would have been a gain of 5.28%.

Given the recent price movement of gold - especially in the last week - and the fact that
over the medium term we remain bullish on gold, we expect there will be new opportunities
shortly to implement fresh limited risk option trades reflecting a long position.

Mark Ridgway
Seven Days Ahead

SEVEN DAYS AHEAD Professional trading guides and recommendations for the World's markets

Authorised and Regulated by the FSA 124 REGENTS PARK ROADLONDON NW18XL TEL +44 (0) 7849 933573
E-MAIL MSTURDY@SEVENDAYSAHEAD.COM WWW.SEVENDAYSAHEAD.COM
This information memorandum has been prepared solely for informational purposes for customers of Seven Days Ahead and is based on publicly available information from sources
believed to be reliable. It is not an offer, recommendation or solicitation to buy or sell, nor is it an official confirmation of terms. No representation is made as to the completeness or
accuracy of any statements or forecasts contained herein and no responsibility or liability is accepted for losses arising from transactions undertaken or investments purchased, sold or
held on its recommendation. Consequently, any persons acting on information contained herein do so entirely at their own risk. Although the opinions contained herein were
considered valid at the time of release, financial markets are subject to rapid and unexpected movements. Seven Days Ahead, its associated companies, their directors, employees,
other customers or connected persons may from time to time undertake transactions or deal in investments mentioned in this information memorandum or have a material interest,
relationship or arrangement in relation to them.