Today’s discussion picks up where it left off talking about the gold/silver ratio (to see part one, go here.)

We are interested in placing a trade based on the fact that the gold to silver ratio is currently very high.

If we want to place a pairs trade using the gold/silver ratio, we first need to calculate the actual ratio by dividing the notional value of the gold futures contract by the notional value of the silvers futures contract.

Right now, this spread ratio would look like: $115,480/$75/085 = 1.5:1.

If we convert that to futures contracts, that comes out to 2 gold futures for every 3 silver futures (2:3). With the adjusted notional IV, the ratio works out to a 1:1 ratio.

After adjusting for IV rank, we are simply going to use 1 gold futures contract and 1 silver futures contract to make our gold/silver ratio trade.

Sell 1 /GC Contract
Buy 1 /SL Contract

Strategies: Pairs Spread

Products Discussed In This Episode: /GL, /SI