Synthetic SPY/GLD Option - How to build it?

Once they list options on SPGH http://etfdb.com/2010/ubs-launches-sp-500-gold-hedged-etn-spgh/ you'll be all set.

 

I could be wrong, but think this product is long s&p and long gold as a hedge, not long/short.

 

max(0, SPX(t)/SPX(0) - K) * GLD(t)/GLD(0)

It's a fairly simple exotic called the quanto option where your payoff is paid out in a different currency. You could dynamically replicate it by buying a vanilla SPX option and re-balancing your GLD delta - you are going to be exposed to the co-variance of GLD and SPX and thus should buy some (very little) GLD vol around the current ATMF. Does this answer your question?

 

There is no way to replicate an option like this statically - you have to at least delta-hedge the GLD/SPX "exchange-rate" exposure. This said, in a low correlation case your re-balancing needs are going to be fairly small.

 

I still believe the above is the simplest way to achieve a SPY/GLD position using gold as the primary currency.

 

Is this a game or is there an attempt to make money here? I'm still lost (nothing unusual though)

 

tj,

check this out


http://www.investorplace.com/46288/index-apple-spy-avspy-ndaq-gvspy-tvspy/

For those otherwise unfamiliar with these newer Alpha Indexes, a brief review is in order. The idea behind the Alpha Indexes and the accompanying option contracts was to provide a trading vehicle that could be used to isolate the relative performance of a company. Rather than betting on a rise or fall in the marketplace, these index options offer the ability to bet on whether a company is going to outperform or under perform the market. In the case of out performance the index will rise; in the case of underperformance the index will fall.

Last November NASDAQ OMX (NASDAQ: NDAQ) also launched the:

NASDAQ OMX Alpha GLD vs. SPY Index (NASDAQ: GVSPY); shows how SPDR Gold Trust has performed compared to the SPDR S&P 500 ETF;

 

Anyway, to make the long story short, lets say you want to buy an SPX call where payout will be converted to gold. So, you do the following:
(a) buy a regulal call option on SPX, say 100 contracts of Dec 130 SPY Calls paying 6.2
(b) your premium, quanto-forward adjusted would be the amount of SPYs you need to short and your GLDs you need to buy

+ 100 SPY US 12/17/11 C130@ 6.2 = $62,000 premium
- 480 SPY @ 129.16 (sell short)
+ 411 GLD @ 150.75 (buy)

this is assuming zero covariance between gold and spx, if you think covariance is positive, you would adjust the amount of short spuds and golds to buy up. Very simple, as you could see.

 

But at the end of the day it's all in USD.

• The account is funded in USD.
• Account value is in USD.
• Withdraws are in USD.

 

Thanks for your response. I think you are very knowledgeable, and it was nice of you to answer.

I have some questions in my mind as related to your answer. My intuition is telling me that I would need to buy volty in GLD and sell it in SPY (for a long SPY/GLD call) or vice versa, for the following reason: In your answer it seems to me that volty and theta would be higher than what the behavior of the SPY/GLD pair would indicate (less volty than the volty in a SPy call).

Could you please comment on this? In essence my first reaction was to buy put on GLD and sell call on SPY (or the opposite, not sure) in addition to the other things you suggested in your first post.

Best regards!