Looking at trading action in gold this week we have seen the market retrace from Sunday night highs in prepositioning ahead of Wednesday’s FOMC statement. Both gold and silver have benefitted from some safe haven appeal due to the recent upheaval in Iraq that is now threatening future oil production.
Nothing like some geo-political unrest occurring in a middle eastern nation to reinvigorate the gold bugs as the yellow metal trades in tandem with WTI crude to the upside. However gold’s recent nemesis, the FOMC, will unveil their policy statement Wednesday afternoon with a post statement question and answer with Fed Chair Janet Yellen.
Despite some hawkish noise occasionally from Fed governors from time to time pleading that the Fed should discontinue stimulus at a more rapid pace than the current piece meal pace of $10 billion a month. The Fed has ultimately erred on the side of caution and kept this taper to a dovish pace with the result being that equities end up surging while gold and silver prices retreat.
But now we have a geo-political underlie that is being driven by a faceless enemy that has traders hypersensitive to any escalations in violence and possible refinery shutdowns from OPEC’s second largest producer. I therefore expect to see some fireworks throughout the remainder of the week and it is my contention that gold will not remain trading in the 1265-1275 range.
The Trade
I therefore propose the following trade. With July option expirations less than a week away, I propose buying the July Gold 1250 put and buying the July Gold 1300 call for a purchase price of 4 points, or in cash value $400.00. I believe that either two things will happen with gold by week’s end.
We either rally to new highs at 1290 and possibly 1300 due to geo-political issues and possibly a more hawkish stance by the Fed which would be a surprise, or retreat back to near 1250, or possibly near term lows at 1240.
The risk on the trade is the price paid for the spread plus all commission and fees. I will look to exit the trade most likely by this Friday’s afternoon 6/20, or depending on market action Monday morning (6/23).
Option expiry is Wednesday June 25. I utilized this option strangle strategy, where one simultaneously buys an out of the money put and a call at the same time to take advantage of a pronounced move in the market, with Silver two weeks ago, and for those who took my advice should have been rewarded. Risk again is the price paid for the strangle plus all commissions and fees with the strategy that the underlying futures price trades near, at, or below either strike price leaving selling either option premium for obviously more than what you paid for both the put and call.
For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for this week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup.
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.
