Options for Outperformance

Transcription

1 Signposting Options for Outperformance Managing the challenges of duration and volatility in Gold 2013 A Year of Extremes in Volatility Trading We can summarise an options market through: At the money volatility curve, volatility smile, correlation Within 3 weeks at the start of April the range in 1m implied volatility exceeded the full year range for 2012 (10.5% to >30%). Volatility curve term structure dramatically changed Skew for puts reached all time highs as price fell below $1200 usd/oz (1y 25 delta risk reversal* reached -4%) Correlation between Gold and other assets broke down, and safe haven flows were brief but sometimes aggressive (Cyprus, Syria) All of the above has led to an options trading environment that has been both challenging and potentially rewarding * See appendix 2 2 Options for Outperformance 10 September 2013 Session 2 - Green 1

2 1m and 1y Implied Gold Volatility (Jan 2012 Present) Gold Implied Volatility Implied volatility (%) Jul 2013 Jul XAUUSDV1M XAUV1Y 3 Options for Outperformance 10 September y 25 Delta Risk Reversal and Spot (Jan 2011 Present) 1y 25d RR 6 1, ,800 1,700 1y 25 delta risk reversal (%) 2 0 1,600 1,500 1,400 Gold spot price (2) 1,300 (4) ,200 XAU25RR1Y XAU 4 Options for Outperformance 10 September 2013 Session 2 - Green 2

3 Options Who and Why? Market Participants Yield Enhancement Directional Views Options Use Volatility Trading Portfolio Hedging Tail Risk Hedging Financial Planning 5 Options for Outperformance 10 September 2013 Tail Risk Hedging Portfolios holding long equities have performed well this year Cypriot default threatened to derail the equity rally in March 2013 Gold s correlation with risky assets, including equities, flipped to negative during Cypriot default* 1. Implied volatility and skew in risky assets increased Implied Gold volatility had reached a multiyear low, and skew was better offered for calls during Q1. Out of the money Gold calls were a cheap hedge* 2 1. See Slide 7 2. See Slide 8 6 Options for Outperformance 10 September 2013 Session 2 - Green 3

4 Tail Risk Hedging Gold vs Aud/Usd Correlation 10 day Correlation: Gold vs Aud Usd Correlation 0.0 (0.5) (1.0) 2013 Mar May Jul Sep Correlation (R(XAUUSD);R(AUDUSD);108) 7 Options for Outperformance 10 September 2013 Tail Risk Hedging: 3m 10 Delta Call Implied Volatility 3m 10d Call Volatility Implied volatility (%) Jul 2013 Jul XAU10CV3M 8 Options for Outperformance 10 September 2013 Session 2 - Green 4

5 Yield Enhancement Multi Asset Investment (MAI) Deposit rates for Precious Metals holdings are close to zero. 1m Gold deposit: +0.30% 1m Silver / PGM deposits: <0.00% Clients can deposit metal and sell an embedded call option to generate a positive coupon for the period They will receive their deposit back in the form of metal (if option is not exercised), or in the form of counter currency (if option is exercised) Yield is affected by: basic yield, maturity, implied volatility, strike price, forward price, upfront payment, risking coupon 9 Options for Outperformance 10 September 2013 Yield Enhancement Multi Asset Investment (MAI) * Source: BARX Live, Barclays. 10 Options for Outperformance 10 September 2013 Session 2 - Green 5

6 Conclusion and Opportunities Many different market participants can benefit from the use of options to improve returns or reduce risk 2013 has shown that clients can benefit from the long and short side of options on Precious Metals (Q1 vs Q2) A more volatile environment presents greater risks that can be mitigated and greater opportunity that can be captured through options 11 Options for Outperformance 10 September 2013 Appendix 1 Contacts and References Charts are sourced from OASIS: A Barclays analytical volatility tool Pricing screens are sourced from BARX LIVE: Streaming options pricing in Precious Metals (including MAI) Barclays sales contacts: Bruce Craven (Asia): bruce.craven@barclays.com Michael Nartey (EMEA): michael.nartey@barclays.com Troy Black (Americas): troy.black@barclays.com Jon Spall (Precious Metals): jon.spall@barclays.com 12 Options for Outperformance 10 September 2013 Session 2 - Green 6

7 Appendix 2 1 year 25 delta risk reversal 25 delta call implied vol 25 delta put implied vol = 25 delta risk reversal Provides a measure of skew for each tenor along the volatility curve BARX PICTURE HERE * Source: BARX Live, Barclays. 13 Options for Outperformance 10 September 2013 Disclaimer CONFLICTS OF INTEREST: BARCLAYS IS A FULL SERVICE INVESTMENT BANK. In the normal course of offering investment banking products and services to clients. Barclays may act in several capacities (including issuer, market maker, underwriter, distributor, index sponsor, swap counterparty and calculation agent) simultaneously with respect to a product, giving rise to potential conflicts of interest which may impact the performance of a product. NOT RESEARCH: This document is from a Barclays Trading and/or Distribution desk and is not a product of the Barclays Research department. Any views expressed may differ from those of Barclays Research. BARCLAYS POSITIONS: Barclays, its affiliates and associated personnel may at any time acquire, hold or dispose of long or short positions (including hedging and trading positions) which may impact the performance of a product. FOR INFORMATION ONLY: THIS DOCUMENT IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IT IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING. NO OFFER: Barclays is not offering to sell or seeking offers to buy any product or enter into any transaction. Any transaction requires Barclays subsequent formal agreement which will be subject to internal approvals and binding transaction documents. NO LIABILITY: Barclays is not responsible for the use made of this document other than the purpose for which it is intended, except to the extent this would be prohibited by law or regulation. NO ADVICE: OBTAIN INDEPENDENT PROFESSIONAL ADVICE BEFORE INVESTING OR TRANSACTING. Barclays is not an advisor and will not provide any advice relating to a product. Before making an investment decision, investors should ensure they have sufficient information to ascertain the legal, financial, tax and regulatory consequences of an investment to enable them to make an informed investment decision. THIRD PARTY INFORMATION: Barclays is not responsible for information stated to be obtained or derived from third party sources or statistical services. PAST & SIMULATED PAST PERFORMANCE: Any past or simulated past performance (including back-testing) contained herein is no indication as to future performance. OPINIONS SUBJECT TO CHANGE: All opinions and estimates are given as of the date hereof and are subject to change. Barclays is not obliged to inform investors of any change to such opinions or estimates. NOT FOR RETAIL: This document is being directed at persons who are professionals and is not intended for retail customer use. IMPORTANT DISCLOSURES: For important regional disclosures you must read, click on the link relevant to your region. Please contact your Barclays representative if you are unable to access. EMEA: EMEA Disclosures APAC: APAC Disclosures U.S: US Disclosures IRS CIRCULAR 230 DISCLOSURE: Barclays does not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor. CONFIDENTIAL: This document is confidential and no part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays. ABOUT BARCLAYS: Barclays Bank PLC offers premier investment banking products and services to its clients through Barclays Bank PLC. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. Barclays Bank PLC is registered in England No with its registered office at 1 Churchill Place, London E14 5HP. 14 COPYRIGHT: Options for Copyright Outperformance Barclays Bank 10 PLC, September 2013 (all 2013 rights reserved). Session 2 - Green 7