From the September 2013 issue of Futures Magazine • Subscribe!

Leveraging futures vs. ETN differentials

Leveraged opportunities

“Metals call options” (below) shows June and December delivery dates for silver, gold and copper futures on April 16, 2013. The three higher price curves for December (square symbol) have silver above copper and gold because of silver’s acceptance by the options market as the most volatile and, thus, the most valuable option of the three calls having the same expiration date. For June calls (triangle symbol), silver is still the highest curve, reflecting its superior volatility. While copper has given up its position relative to gold, the two price curves are almost equal. 

Heights of options price curves, as measured by the ratio of the call value at the point where the futures price is equal to the strike price, indicate the options market’s assessment of relative (implied) volatility for each futures contract. For the calls on silver, gold and copper, the curve heights for the December expiration are 8.77%, 6.34% and 7.18%. For June futures, they are 5.19%, 3.76% and 3.12%. 

The call price curve heights are determined by the spread between upper and lower breakeven prices (at which a neutral delta spread will return neither profit nor loss at expiration). According to the options market’s forecast on April 16, 2013, December breakeven prices for silver, gold and copper are $29.64-$20.61, $1,657.28-$1,257.62, and $3.88-$2.91, respectively. These price ranges compare with the December futures prices on April 16: silver, $23.665; gold, $1,378.40; and copper, $3.34. As always, the options market does not forecast a direction of price change. It only cares about volatility and time to expiration in determining call and put prices.

Descriptions of the gold and silver ETNs indicate that they are an easily traded pair, priced as exchange-traded securities not too far apart in dollars and cents.

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