Few would be surprised that gold has been the leading asset class in the market over the past 12 weeks.. The visualization comes from a relative rotation graph, where I chart the performance of all CME Group futures products. The first observation is in the upper right quadrant, labeled leading, and the lower left quadrant, labeled lagging. Gold is clearly the leading asset, but live cattle is also firmly positioned in the quadrant. This probably doesn’t surprise any restaurant that has beef on the menu, and probably doesn’t surprise many patrons either. Also, not surprising is the lagging quadrant, which contains all Equity and Crypto products. The riskiest parts of the market are clearly lagging behind cash and other assets. The most interesting parts of the graph, though, are the weakening and improving quadrants. These areas show the former leaders that are losing some luster, or former laggards that are gaining some steam. This is often where money can be made or lost as assets transition from one area to the next, which always happens over time. Traders aren’t there yet, but they can start to see gold losing momentum, which could eventually push it into the weakening quadrant. Keep a close eye here.

To see some of this loss of momentum, I turn to the daily and weekly technical charts. The top chart is the daily ichimoku chart, and a few things stand out. First, the cloud itself, which has been trending higher for a year, is starting to flatten. This indicates a slowing of momentum, which you can see in the sideways price action. Second, the MACD has already crossed over and turned lower, another sign that traders have lost some of the strong bid to the market.  The bottom chart may be more concerning. It shows a strong weekly trend that has persisted over the last few years. However, the overbought RSI is particularly notable. When combined with the MACD starting to show signs of a potential crossover and downward turn, traders might be looking at a weekly chart that heads back to the cloud, which is around $2,600. This would be concerning for those that have rotated into this market.

Within the gold market, one story that has made the rounds is the premium of historical volatility to implied volatility that has appeared since Liberation Day in April. On this chart from QuikStrike, you can see a red line, which measures the actual volatility seen in the futures market, has moved sharply higher. Initially, the blue line, which measures the implied volatility priced into the options market, kept pace, but it has since flattened out. It is uncommon to see such a large disparity between historical and implied volatility because market makers could make this difference by delta-hedging their positions. This may suggest that the spread is the result of a large supply of options, perhaps by investors who are overwriting their positions.

Turning to the CVOL Indices, there are a couple things that stand out. The top chart shows the CVOL Index over time and relative to the underlying. Here you’ll see that implied volatility is still near the highest levels of the last few years even after the recent pullback. The more interesting chart is most likely the bottom one, which shows the skew ratio. This ratio compares upside volatility to downside volatility relative to the underlying asset. Typically, as gold prices move higher, especially into new all-time highs, there is usually an increased demand for upside options. Though lately with higher underlying prices, I see a skew ratio that is falling. While still above one, indicating that upside volatility is higher than downside, the falling ratio indicates to me that there may in fact be traders selling upside volatility against long underlying positions. This may further make the case for a loss of momentum in futures.

If the underlying is losing momentum and implied volatility is trading below historical volatility because of higher supply, this may present an opportunity to be long options, even though the level of volatility still looks high relative to the past few years. In order to determine where you might want to position yourself, it is useful to look at the term structure of implied volatility. Short-dated options have more gamma and long-dated options have more vega,  therefore, if I’m positioning for an increase in implied volatility, I’d best be served buying further out. However, if I’m positioning myself to take advantage of the historical to implied spread, focusing on gamma options is the better route. The top chart shows the term structure on a monthly basis and one can see the downward slope, indicating that short-term vols remain high because of recent movement, but there is an expectation of mean reversion to long-run norms over time. I might not want to be at the highest part of the curve, but somewhere between the June and July expirations, where the curve is sharply downward-sloping, could provide the right amount of gamma at a more reasonable price. The bottom chart narrows between the June and July expirations to look at the daily options expirations. You can see the subtle pattern where Monday options volatility is consistently below the Friday options volatility because traders don’t want to pay for the weekend when markets rarely move. However, with so much news coming out during the weekend in this administration, and since the wide ranges witnessed in gold are in response to tariff uncertainty that still remains, there may be some opportunity here.

As I looked at the implied volatility of the various options, I settled on a Tuesday expiration at the end of June. This volatility was the same as the Monday before, so I was still getting the weekend discount from the previous Friday. In addition, it was near the low part of that term structure curve, so I know I was paying one of the lowest implied volatilities of 20.48. Looking again at the earlier charts, the historical volatility for the last 20 days was over 30. I am able to buy a 25-day option for 20.48. This is a meaningful discount to historical that is taking advantage of the supply of options in the market. The job for me, since I have bought a straddle and not a directional trade, is to make back my daily theta, or time decay, in order to cover my cost. I can do this in one or two ways. First, I could look at the breakevens of the straddle, shown to be 3124 and 3425, and bank on futures expiring outside of one of those areas, even if I do not have a strong view on direction myself. This is possible but may be more typical when traders look at straddles expiring within a week, instead of with 25 days still left. The second way is to gamma-scalp the straddle. Again, there are a couple ways to do this. A trader could either set their buy or sell orders every 0.5 or one standard deviation, and whenever deltas accumulate from their straddle at those levels, they take profit. Then they put in the new orders and go. This is a common way for buyside traders to look at scalping the gamma in a straddle. Market makers may choose a time trigger instead of standard deviation trigger, given the different demands on their time. They would make sure they are flat at the start of the day, flatten in late morning after the early morning moves, flatten again after the afternoon coffee before the close and flatten at the end of the day. While this may not be optimal to try to find the highs and the lows, it may be more practical if traders have a lot of positions to manage. Either way, the goal, and the signal of whether it is working, is whether one can make more by buying low and selling high, than what it costs in ‘rent’ or theta to carry that position overnight. Each day the options will lose value, and this will accelerate as contracts near expiration. As long as one is able to make more trading, the position is profitable. With a 10 vol point head start, this should be possible. If Gold futures break down from a loss of momentum and accelerate to the downside, this could be very possible. However, the risk for the trader is that the market sits and does nothing. There is nothing more frustrating, in my opinion, than going all day without being able to trade my gamma, knowing that I’m still paying theta. If enough has been sold to market makers, such that buy and sell orders begin to narrow, it could become a self-fulfilling prophecy. However, given the absolute level of implied volatility still above average, it indicates that the supply has not been that large, and that even though there is a discount to historical, there still may be opportunity.

Gamma scalping straddles may seem advanced to many new traders. However, it is a good skill to develop and could prove very useful in markets that are changing directions. The opportunity presented in the gold market right now may be a great time to give it a try.

Good luck trading!

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