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 support@tastytrade.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.

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