Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Trade Gold Options Using Calendar Spreads

Commodities / Gold and Silver 2010 Nov 10, 2010 - 03:30 AM GMT

By: J_W_Jones

Commodities

Best Financial Markets Analysis ArticleMost market participants are aware that precious metals have been on fire rocketing higher only to consolidate briefly, gap higher, and leave slowly reacting traders in the dust. The parabolic moves in gold and silver have many potential connotations, but great traders respect price action as the final arbiter and adapt. Since the financial crisis began, many traders have evolved into reactionary lemmings.


For nearly two years we have been conditioned by the Federal Reserve, the SEC, the U.S. Treasury, and the federal government itself that no matter the situation government entities will bail everyone out. Never before in American history have free markets been tampered with to such a degree. As a result of these manipulated market perturbations, traders need to reflect and think seriously about market conditions with the intent to see all sides without any directional leaning.

With that in mind, imagine what would happen to the price of gold, silver, and oil if the dollar strengthened on the heals of a sovereign default issue in Europe. The simple truth is that the short dollar, long risk asset trade that so many traders and money managers are involved in could blow up in their face should the U.S. Dollar put in a strong bounce higher. The real question is whether this is just another short term bounce or whether this is the beginning of an entirely different sequence of events.

Equity traders acknowledge that while the stock market indices are significantly higher the rise in the equity and commodity market was accompanied with a significant selloff in the U.S. Dollar index (.DXY). The chart below illustrates the extreme selling pressure and the ascending trendline drawn on the weekly chart indicates a critical support level that must hold if the dollar is to put in any sort of a bounce.

Based on the chart above, a trade setup with crisply defined risk around the 75 area comes into view. Should the 75 area breakdown, more sellers would emerge leading to significant downward pressure on the dollar causing precious metals, specifically gold and silver to rally fast and hard. If the 75 level holds and the dollar bounces, it would likely place downward pressure on equities and precious metals. When we look at a gold chart, it is relatively obvious that gold is trending higher. Gold is at all time highs, which causes it to be scary to play either direction simply because we do not have any long term support/resistance areas that are nearby at this point as seen below:

With the gold chart being extended, it makes sense to key trading decisions off the dollar. Traders could get short gold with contingent stops on the other side of 75ish on the dollar index. Should the 75 level break with confirming volume, traders could get long gold. At this point, anything is possible it would seem based on the recent price action. Two potential trade setups could be taken depending on a trader's directional bias. A trader with a long bias could either enter on any slight pullback on a short term gold chart (10 Min, 15 Min, etc.) and use the 75 area on the dollar index to place a stop order.

With most traders being extremely bullish with regard to gold and silver, I thought I would be different and post a short trade. Keep in mind, this trade is based on a period of time that will end with the November 19th option expiration. The trade construction is a put calendar spread. In the example being used, the primary profit engine is time (Theta) decay. However, because we used puts that were slightly out of the money, this trade does have a very slight short bias if gold were to decline. As is usual with trades that I post, the passage of time is our friend. Additionally, for the sake of analysis I used the Monday evening closing prices on the GLD option chains to illustrate this example.

The trade is constructed as follows:
           Short(Sell to Open) 1 November Week 2 (Exp. 11/12) 136 GLD PUT
           Long (Buy to Open) 1 November Monthly (Exp. 11/19) 136 GLD PUT

This type of trade is referred to as a calendar spread. The characteristic profitability curve is listed below:

The trade will be profitable this Friday at market close if price stays within a range of 132.80/share to around 139.30 per share. The maximum gain would take place if price on GLD closed this Friday precisely at 136/share and would produce a maximum gain of around $115 per leg. The maximum loss on this trade is $64 per leg. Keep in mind that if price stayed within the confines of the range, the option trader would have the ability to take profits this Friday or build another position utilizing the November monthly put which would expire on 11/19. These estimates assume implied volatility remains constant and that Vega is positive. It should be considered reasonable to assume the relative constancy of implied volatility over this truncated period of time and anticipated price movement represented in the above example.

While this strategy may seem quite basic, it can produce some insane risk/reward opportunities with a crisply defined risk level. The trade offers opportunities for trade management should market conditions change and the trade allows for a significant margin of error. Through the utilization of contingent stops based either on the GLD price or on the dollar index chart, an option trader utilizing this strategy can get short with a defined amount of risk and with very little emotional capital being exposed. While this is a speculative play regarding the short side in gold, it is an outstanding example of the power that options offer to traders who understand their price behavior.

For those of you wanting to get long gold via GLD for a longer term trade, be sure to watch for my next article later this week as I am going to focus on a strategy that utilizes options for a longer holding period (2-3 Years) and has the potential to produce massive long term gains should the gold price continue higher over the intermediate to longer term.

If you would like to continue learning about the hidden potential options trading can provide please join my FREE Newsletter: www.OptionsTradingSignals.com 

 J.W. Jones is an independent options trader using multiple forms of analysis to guide his option trading strategies. Jones has an extensive background in portfolio analysis and analytics as well as risk analysis. J.W. strives to reach traders that are missing opportunities trading options and commits to writing content which is not only educational, but entertaining as well. Regular readers will develop the knowledge and skills to trade options competently over time. Jones focuses on writing spreads in situations where risk is clearly defined and high potential returns can be realized. 

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.  


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules