In the last two weeks gold has put on better than $100/ounce trading to its highest level since mid-June. Upside was capped at its 100 day MA (red line) and trend line (blue line) that has been present for all of 13’. More impressive has been the move since bottoming on 6/28 at $1183 as gold futures have appreciated 16% in less than 2 months…perhaps too much too soon. Though I missed the appreciation with clients I do think traders could attempt a trade in the other direction. Those in bullish trade should be booking profits and aggressive investors could attempt to play a coming depreciation.
The anticipation of tomorrow’s FOMC minutes has caused some pause in precious metals trade. Though the metals are finding support from some outside markets I do feel profits should be booked near current levels ahead of this release. Investors are looking for clues on the timing of Fed “tapering” but that may not be delivered tomorrow.
Fresh bearish entries should be willing to cut losses on a settlement above the 100 day MA and trend line as further appreciation would likely follow.
As for constructing a trade…
- Buy September $1325 puts for $450 willing to risk the premium paid. The danger in this play is you only have 8 days. On a break of $30-40 in the futures you should be able to double your investment. Not the best risk/reward at 1:1 unless there is a more significant break this week.
- Back ratio spread in October. Sell (1) $1350 put for $2900 and buy (2) $1325 puts for $2050 per for a total of $4100. The entire package should cost $1200 and you should have a positive delta of 20% with 37 days time. On a trade in the futures back to the 50 day MA in the coming weeks this should be worth $2000. Factor in 3 transaction costs when initiating this trade.
- Short (1) December futures and sell (1) $1350 or $1325 put as a partial hedge. You would collect more of a cushion the higher the strike. As you raise your strike it would allow more protection but you would sacrifice some profits with the higher strike if gold depreciates as anticipated. At current trade the $1350 could be sold for $5,000 and has a 44% delta. The $1325 could be sold for $4,000 and has a 37% delta. There is just over 3 months time on the trade.
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