Gold Digging: ETFs vs. Futures
Jul 30, 2015
By: Sage Anderson
With gold recently hitting a five-year low and oil breaking below the $50/barrel threshold, the commodities complex has without question been under considerable pressure thus far in 2015.
Plummeting asset prices are often characterized by both volatility and opportunity, and as such, today's blog post revisits some compelling tastytrade content related to the commodities trade - specifically gold.
Some of the more popular methods of trading commodities include taking a position in the physical asset, trading an exchange-traded fund (ETF), and/or trading futures. Because dealing in physical goods can often require boatloads of capital, many traders frequently choose to access commodities in the latter two vehicles: ETFs and futures.
Today we review some exciting new programming on the tastytrade network that examines both of these trades as well as the relationships between them.
In a past episode of What Else Ya Got? entitled "Trading the Gold ETF (GLD)," Tom Sosnoff and Tony Battista tackle the ETF portion of trading precious metals. The hosts kick-off this segment by highlighting the fact that gold prices are often inversely related to the state of the global economy.
The chart below illustrates that as worldwide economic conditions have stabilized over the last several years, gold prices have retreated:
On this segment, Tom and Tony also highlight a study done by the tastytrade team focusing on the implied volatility of GLD, one of the most heavily traded gold ETFs. Using data from 2011 to present, the team backtested a strategy that sold a near-term strangle (closest to 45 days-to-expiration) in GLD to ascertain the likelihood of profitability.
The study looked at three different scenarios that integrated an important tastytrade concept known as implied volatility rank (IVR). The IVR measurement simply tells us whether implied volatility is high or low in a specific underlying based on the past year of implied volatility data. For example, if XYZ has had an implied volatility between 30 and 60 over the past year and implied volatility is currently 45, then XYZ would have an IVR of 50%.
In the study conducted on GLD, the team looked at selling low delta strangles (~0.16) under the following scenarios: without consideration to IVR, when IVR was above 50, and when IVR was below 50. The results, as shown below, were quite revealing:
As you can see in the above slide, the strategy that executed selling strangles in GLD closest to 45 days-to-expiration with an IVR above 50 was clearly the strongest in terms of profitability with a positive PnL of $4,425. While the other two strategies had a similar rate of winning trades (79% and 77%), the absolute return on both was negative.
Pete Mulmat, a recent addition to the tastytrade family, has been leading a new initiative focusing on futures trading within the tastytrade programming network. Commodities futures are another popular trading vehicle and in one of his recent Splash into Futures episodes, Pete highlights some of the key differences to keep in mind when trading the gold futures product as opposed to gold ETFs.
The slides below, taken from that same episode, highlight some important differences between the GLD exchange-traded fund and a gold futures contract:
As illustrated above, Pete walks viewers through the detailed differences between the products throughout the episode, but one key point from the above to highlight is the relative buying power efficiency of gold futures contract vs. GLD. The initial margin requirement in Pete’s example for gold futures is only $4,125 as opposed to over $58,000 for GLD.
In the latter parts of this Splash into Futures episode, Pete also introduces silver and copper futures trading into the discussion as well as the historical correlations between these three precious metals.
With commodities prices currently in focus, the above tastytrade content serves as a perfect starting point for learning more on ETF and futures trading. The team at tastytrade has produced a great deal of interesting content on ETF trading which can be accessed by following this link.
Similarly, Pete's entire Splash into Futures library can be found following this link.
If you have any questions on ETF and futures trading in the realm of commodities we encourage you to email a question to email@example.com or comment below.
Your feedback directly impacts future programming at tastytrade, so we look forward to hearing from you!
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.