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Gold/Mining/Energy : Gold Price Monitor

GDXJ 98.04

+0.4%

Nov 11 4:00 PM EST

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To: Square_Dealings who wrote (64769)	2/28/2001 9:52:21 AM
From: russwinter	Read Replies (2) of 116754

A little gamma spike here would be just want the doctor ordered, and here's why. Today's lesson in delta hedging. Go to following site: mrci.com Notice implied volatility chart and in particular the red line. That's implied volatility (IV) of gold. Next note the rather dormant pattern between mid-2000 to early February at 12-14. Then notice the sudden (gamma) spike very recently to 19-20. That number plus a price move towards the strike price is what determines the delta equation. If you are a naked call hedger (which is a big trade with speculators, bullion bankers and hedgers)the delta is your black box requirement to purchase or sell gold to back your naked position. OK, bear with me. Don't glaze over on me, I'm coming to the best part. Let's look at an example: go to Aug, 2001 C300 (c means call): Shows a price of $4. Go to the IV column, and note it shows 20.3. Go to delta, it shows 21.64. What does this means if you are naked short 100,000 oz of this particular strike price? In early February is was about 13. The move to 21.64 requires you to purchase 8,640 oz of gold as cover requirement. So the higher gold goes toward strike prices and the higher IV and gamma goes, the more gold you need to buy. It gets worse if you have longer dated calls written. And the best news of all?: there are millions of ounces of these naked calls written out there. In fact here's a pretty good candidate right here: Message 15399840 Let the fun begin.

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