Equity hedging through cheap gold call options

Aug. 6, 2017

Options Backtesting Results

Historical average return: +$351.49 (backtested over 12.7 years)
Historical success probability: 46.4%


Since the beginning of July, gold has rallied 5% from $1200/oz to $1264/oz while its implied volatility continues to drop to historic lows. Straddles on gold imply a 4% move in the precious metal over the next three months, a 1st percentile occurrence over the past nine years. Those looking for market hedges can take advantage of the negative correlation between gold and equities with cheap gold call options. Options backtesting shows this trade has a positive average return, a very rare occurrence for a hedging strategy.

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