Gold’s resurrection has been a sight to behold. Some say it was inevitable, and I agree! You don’t have to be a prophet, just a student of history. Every beaten-down asset eventually has its day in the sun.

‘Tis not a matter of if, but when. And the when for precious metals is 2019.

Volatility Skewered

The most popular vehicle for retail traders to play precious metals is GLD and SLV. Both are ETFs that perfectly track the daily movements of gold and silver futures. Both have liquid options which allow for building all sorts of trading strategies.

Today I’m going to teach you about one unique characteristic of GLD options. They carry what’s known as “reverse skew.” As a precursor to diving down that rabbit hole, it helps you understand what normal volatility skew looks like.

Skew is the term used by traders that describes how puts generally trade richer than calls. That is to say, OTM puts are usually more expensive than OTM calls. The reason is that the risk with stocks is to the downside. People panic out of stocks, not into them. Since traders fear crashes, they willingly pay more for OTM puts than they would be willing to pay for OTM calls.

Consider the following example using AAPL stock options:

I drew an orange box around the IV for the 20 delta put (190 strike) and the 21 delta call (225 strike). Though both have similar deltas, the put trades at a 31.82% IV and the call trades at a 24.50% IV.

So what?

Well, with stock options the skew works to your advantage if you’re selling naked puts or bull puts because you’re able to go further OTM and/or receive more premium. On the other hand, it works against you when selling naked calls or bear calls because you can’t go as far OTM and/or receive less premium.

This is why when you sell an iron condor the put side is usually further away than the call side.

But with GLD options, everything flips on its head.

Reverse Skew

Because gold is a safe haven asset, something that people flee into during times of turmoil (like now), the risk is to the upside. Stocks crash down; gold crashes up.

There is more demand for OTM calls than OTM puts. So, calls trade richer than puts. Take a look at the Oct GLD options chain below:

Here’s the takeaway. Bull put spreads and naked puts on GLD don’t allow you to go as far OTM or receive as much premium as what you’re used to on other stocks. You can still do it, but you have to lower your expectations.

On the flip side, bear call spreads or naked calls in GLD than they are in stocks. Of course, you’d have to have a neutral to bearish bias in GLD before employing such strategies – which is probably not now. But if we reach a point where you do want to bet the sizzling rocket ship fizzles you can go pretty far OTM with bear calls.

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