Gold hit a new low last week down at $1268.7 an ounce. Gold prices have plunged over 20 percent since the beginning of April. Worries about the Fed’s policy objectives have added volatility and caused many to question their confidence in their positions.
From Asia to Europe and back here in the U.S., the chatter concerning the Federal Reserve’s easing intentions took hold and markets tumbled. The message however is clear, the Genie is coming out of the bottle and the measures of monetary stimulus used to support sustainable improvements in economic trends will be varying soon.
STOCK STUMBLE
The U.S. equity markets last week stumbled in reaction, sending the Dow Jones lower with a 1.17%, reducing the year-to-date gains to 15%; the NASDAQ sliced off 1.32% to for 13.38% on the year; the S&P500 pitched 1% down to 14.06% year to date. The CBOE VIX rose 28.5% to 17.15 as further proof of investor trepidation.
LOWER FORECASTS
This uncertainty has left some metals traders to keep the pressure to the downside, with banks and investment houses, most notably Goldman Sachs and HSBC to lower price forecasts for both gold and silver, this year and next.
It is my belief, that at least for a little while that pressure will remain in the metals complex and therefore I am proposing the following trade.
THE TRADE
With a little over a month until August option expiration, I am looking for gold to possibly challenge the $1200 level before we possibly see a late summer rally. Given this, I believe there may be an opportunity to put on a bear put spread in gold.
Currently, one could look at buying the August gold 1225 put and sell the August gold 1200 put for a purchase of 4.5 points, or in cash value $450.00.
Should both strikes finish in the money at expiration, the maximum profit would be around $2,500.00, minus commissions and fees. If both strikes were to finish worthless, the loss would be the cost of the spread, which in this case is $450.00 plus all commissions and fees. August gold expiration is July 25th, so I will potentially only hold the position until the second week of July or at least through monthly unemployment release.
Reach Lusk here with questions.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
