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P aul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014

A pplication of Gold Options in Enterprise Risk Management. P aul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014. Exciting Opportunity. Extraordinary moment in time

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P aul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014

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  1. Application of Gold Options in Enterprise Risk Management Paul Sacks, CIO, Aurum Options Strategies, LLC Shanghai Derivatives Market Forum May 29, 2014

  2. Exciting Opportunity • Extraordinary moment in time • Discussion of options, particularly in this amount of allotted time, is more interesting and informative by way of example. • Let’s talk about GOLD • Benefits – ubiquitous academic research • Landscape looks problematic • Improving economic data, QE tapering • Problems (FOR HEDGER AND INVESTORS) • Options strategies, what options can offer • With that said… • “I am the biggest gold bull in the room.” • “I own zero gold.”

  3. How Options Mitigate Risk • This is a topic about which I am passionate • I will highlight • What makes options unique • Gold options strategies that can benefit HNW individualsand gold consumers • Some introduction to building blocks • Some more complex option combinations • Examining PnL graphs and comparing pros and cons • A common strategy employed by commercial hedgers and an innovative approach to improve it

  4. Options: A Unique Tool • Characteristics that make options unique and interesting • Asymmetric return profile • Time dependency • Strike dependency • Path dependency • Multi-dimensional • Unmatched in their potential for diverse financial “expression”

  5. What Next? Source: CQG

  6. Okay … Let’s Get Into It • How can we use options to improve our gold exposure? • Starting simple • Vanilla calls and puts • Call option • Debit • Premium at risk • Limited “tenor” typically inexpensive • Long 1 June 1400c at 0.50 USD 0

  7. Building On It • Call spread • Still initiated for a debit • Financing • Limited upside • Increasing tenor • Long 1 December 1350c at 35.00 • Short 1 December 1400c at 20.00 • 15.00 debit Profit Spread Price { 0 1350 1400

  8. More Complex • 1x2 call spread • Net short calls (-1) • Unlimited risk • Long 1 December 1350c • Short 2 December 1400c • Collecting premium • 5.00 credit Profit 1350 1455 1400 Gold price at expiration

  9. Aurum Structure • Lets combine two building blocks • 1x2 call spread + outright call • 1x2x2 (multiple tenors) • Key benefits • Capital preservation - overall short premium • Leveraged upside - net long calls • Key risks • Requires active management, purchasing of front month outright calls, must buy this short dated call

  10. Strategy Description by Regime • Possible outcomes • Absolute return area • Uncorrelated to gold • Slight negative beta • Mitigation of downside volatility • Benefits of optionality; no stop outs • Uncorrelated to gold • Beta close to zero • Large potential gains due to leverage • Outperformance relative to long underlying • Correlated to gold • Strong positive beta Price of Gold

  11. Beneficiaries • It works well for • HNW individuals that own gold • Investors who want gold-like protection in their portfolio, but don’t want to experience the 2013 downturns. • For them gold represents an insurance play. They know they are not market timers. • They have the potential to make more on an extreme move anyways. • Should also be considered by • Consumers, jewelry makers, etc… • Anyone who inherently benefits from a lower price (cost of input), and conversely is punished by a higher price • WHAT ABOUT COMMERCIAL HEDGERS?

  12. Quick Pause… Commercial Hedgers • Gold Mines • Increase predictability • Smooth cash flows • Focus on “core” business • Increase competitiveness • Make profitability a function of how well they run business, not where gold goes

  13. Most Common Approach • What is a zero cost collar? • buy a put and sell a call to finance it • Combining underlying with zcc = look familiar? Profit Gold price at expiration

  14. Standard Net Result • Gold mine’s new PnL graph with zero-cost collar (50% hedging) Profit Gold price at expiration

  15. ZCC – Often Used, But Best? • Zero cost collars are not “zero cost” • Forgo tremendous upside PnL • You are selling low vol, buying high vol Long Put Short Call

  16. Back to Aurum Structure • Commercial hedgers need to protect downside, not upside • Remember options are nearly the definition of flexible • Superior hedging strategy for Gold mines • Full participation in upside • Equal flexibility to downside protection price • Selling, not buying, higher priced vol

  17. Back to Aurum Structure

  18. Back to Aurum Structure

  19. Conclusion • Options are unmatched in their ability to enable you to employ financial expressions, manage risk • For consumers, producers and investors • Flexible • Optionality • Efficient leverage • This is why … • “I am the biggest gold bull in the room.” • “I own zero gold.”

  20. Disclaimer • This talk has been a quick overview of complicated strategies. It is notintended to be taken as a specific trade recommendation, nor asolicitation of any kind. • Trading options involves risk. Option pricing is impacted by many factors and requires experience. Any of my colleagues or I are willing and happy to discuss risk management strategies in further detail.

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