Gold options investors are increasingly paying for upside potential rather than downside protection, according to Susquehanna. One-month implied volatility on gold has dropped to near recent lows, marking a significant shift from the summer when put protection carried a richer price. As reported by Susquehanna, this change represents a major turn from the earlier period when downside protection was relatively more expensive. Skew, which measures the relative cost of puts versus calls, has shifted from downside protection to upside participation, with this shift already showing up in recent trading flows. The options market has repriced alongside the rally, reflecting the market's confidence in continued upside potential.
Gold has demonstrated exceptional momentum in August, climbing over 10% to above $4,400 per ounce, representing the sharpest monthly recovery since January. According to Business Standard, this extends the recovery that began in July, when the metal posted a 2% gain after closing March through June in negative territory. The metal had shed more than 25% over that four-month stretch, completely wiping out its yearly gains. The August performance has been particularly noteworthy, with the metal breaking decisively above its $4,000-$4,200 consolidation range in the first week of the month, posting its strongest weekly performance since January. The metal has maintained its position above the critical $4,300 level and shown sustained upward momentum throughout the month.
The recent rally has been built almost entirely on a shift in Federal Reserve rate expectations, with the probability of a September hold now standing at 67%, up sharply from 42% a month ago. As reported by Business Standard, this represents a genuine repricing of the tightening cycle, with December hold odds moving to 35% from 20%. The mechanics of August's recovery were driven by softer crude prices that eased inflation concerns and brief optimism around a Hormuz shipping arrangement. US data flow has been the most consequential driver, with July's releases showing Nonfarm payrolls fell by a surprise 23,000, the first outright decline in months, while July CPI and PPI both confirmed disinflation is holding. However, the bond market's response has complicated the picture, with the 10-year US Treasury yield climbing to 4.75% and the 30-year pushing to 5.33%, creating a conflicted environment that has partly explained why the recovery has stalled rather than accelerated.
The options market has reflected this shift in sentiment through specific trades. According to Susquehanna, the firm noted a purchase of 8,000 November 460 calls on the SPDR Gold Trust at roughly $5.55, with the fund closing Monday at $405.49, leaving it about 13% above the market. Chris Murphy, co-head of derivatives strategy at Susquehanna, highlighted that skew has shifted materially away from downside puts and toward upside calls, reversing the earlier summer setup when put protection was relatively richer. This shift has already shown up in recent trading flows, demonstrating the market's confidence in continued upside potential. The options market's repricing alongside the rally reflects this fundamental change in investor sentiment toward gold.
Despite the shift toward upside calls, hedging activity remains present in the market. As reported by Susquehanna, traders purchased around 25,000 September 350 puts at $0.62, representing a modest premium to cover roughly 14% below the price. The success of call buying may depend on Federal Reserve policy decisions, with Fed Chair Kevin Warsh's Jackson Hole keynote on August 28 being the immediate directional catalyst. According to Business Standard, the People's Bank of China added 20 tonnes to its gold reserves in July, extending its buying streak to 21 consecutive months - the longest on record. Chinese gold ETFs have added approximately 8 tonnes so far in August, with sustained institutional allocation providing a structural demand floor beneath prices. The immediate directional question centers on whether the disinflationary narrative survives contact with Jackson Hole, with a dovish lean potentially pushing prices to test $4,450 and a hawkish surprise risking a test of $4,300 support.
