Abnormal Options Chains

Futures options are there so that delivery can be taken of commodities at a certain price, on a certain date. But there is now a very abnormal style of options chain developing mostly in the gold and copper futures.

If you look at oil or treasuries futures, you'll see a normal progression of strike prices and open interest. But this is beyond what you would call normal:

http://quotes.ino.com/options/?s=NYMEX_GC.N12

As you go further out along the futures expiry dates, the options chains look more normal, but you can see how the near futures month can develop into a completely absurd choice of either puts higher than the spot price, or calls far below the strike price.

This explains mostly why options expiry has been unusually quiet as of late, and sell offs occur at regular intervals. As we saw, gold spot prices rose on the quarterly close, possibly signalling that futures markets are now suborned to derivatives, and that all asset classes are now subject to derivatives.

What this might cause is for traders to crowd into the spot market. There will be people to take delivery of copper, but since gold is rare and hard to come by traders will probably cash out and buy the near futures contract again.

This might result in copper taking a dive or going nowhere, and gold rising into backwardation. Antal Fekete's theorized gold backwardation might be the result.

Gold is still in its contango for the moment:

http://finance.yahoo.com/q/fc?s=GCN12.CMX

There is a hugely leverage position against GBN.V shares in the form of an equity swap, since GBN.V is trading strongly inversely correlated with the 30-year U.S. treasury bond price.

The solution in this case is to provide a dividend to shareholders, because then at least under rules provided by the black-scholes options pricing model, share values must be calculated under forward earnings, rather than trailing earnings. Since there are no options calculations you can make with GBN.V as a venture-listed stock, calculations must invovle the share price against treasuries futures option contract prices.

Since treasury prices cannot rise much further, trading in treasuries is bound to decline, thus introducing arbitrage risk into the share price, which is not tolerated under the black-scholes options pricing model used in delta hedging strategies.

-F6