There are reasons on both sides of the bull and bear aisle to fuel the gold market’s future longer term direction.
The battle currently waged by individual speculators and funds alike have gold trading between the upper and lower trendlines, seen on Figure 1 below.
Last Thursday’s (8/21/14) breakdown to $1273.4 basis December futures rubbed right against the down trendline, only to see the market bounce through September option expiration. July’s rally up to $1347.5 basis December 2014 futures touched the upper trendline that dates back to May of 2013.
Wedge Formation
Since then the market has continued its range-bound wedge-like formation with the wedge becoming tighter as the weeks go by. The bulls are hanging onto geo-political unrest throughout the world along with continued global central bank monetary injections as a reason to stay long the market. The bears would argue all-time highs in the equity markets coupled with a higher U.S. dollar and lower energy prices as reasons to be short. Simply there has been a lack of conviction to both the downside and for a sustained rally in gold which leaves investors with a range bound market.
Markets that continue to wedge often break or rally substantially at some point, so here is a trade worth considering.
Trade Idea
I propose buying the October Gold 1240 put and simultaneously buying the October Gold 1340 call. This strategy is referred to as an option strangle. The purpose is to be positioned on both sides of the Gold market, buying option premium, one put and one call. The trader is not interested in which direction the market trades, but is speculating that the market will make a significant move of at least 35 to 40 dollars before option expiration. The cost and risk on the trade proposed comes in at $600.00 plus all commissions and fees.
Webinar
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. 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.
