Closing the Gap - Futures Edition

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Oil vs. Gold: Relative Value Dynamics

Closing the Gap - Futures Edition

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The number of barrels of Crude (/CL) required to purchase one ounce of Gold (/GC) is known as the Oil-Gold Ratio. Given the price activity in Crude Oil over the past years (while Gold has held steady), the ratio has experienced large swings. Recently, however, the ratio has seen a significant decline. In hopes of a reversion, Pete, Tom and Tony present a pairs trade in these two commodities which would capitalize on more barrels of Oil required to purchase an oz. of Gold.

The notional value of /GC is currently more than twice the size of Crude Oil. However, the implied volatility in Crude is double that of Gold. In order to properly set up this pair, Pete breaks down the calculation:

Ratio = (Crude Notional/Gold Notional) x IV Differential Percentage

GOLD Contract Specs
  • Symbol: /GC
  • Contract Size:100 TROY OZ
  • Delta: 100
  • Minimum Tick: $0.10
  • Tick Value: $10.00
  • Expiration: February, April, June, August, October December

CRUDE OIL Contract Specs
  • Symbol: /CL
  • Contract Size: 1000 BARRELS
  • Delta: 1000
  • Minimum Tick: $0.10
  • Tick Value: $10.00
  • Expiration: MONTHLY

Tune in for the full discussion as well as how Pete, Tom and Tony reasonably expect to manage this spread.

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