Heading into the all-important two day Federal Reserve meeting next week, where the Fed could announce a reduction in stimulus measures or “tapering”, it is my purview that both sides of the market should have exposure.
GOLD MARKET ACTION
After hitting a high of 1416.0 an ounce on the first trading day for September, Gold has slid back under the its 38 percent retracement level, and now looks to me that more downside action may be seen. It is my belief, that the heavy selling in the Gold market the last 36 hours was largely due to a sudden reversal on Syria by the Obama administration, after weeks in which the administration threatened intervention against the Assad regime for their use of chemical weapons in the two-and-a-half year old war.
FOCUS BACK ON DATA
In my view, the war drums will slowly and quietly go away as Russia brokers a deal to rid the Assad regime of biological weapons. This will stunt any engagement at least for now by the U.S. For traders, they will go back to trading the markets one economic report at a time until the Fed makes its announcement next week. There was no doubt in my mind that the recent news prompted recent some longs in the market to cover.
Despite gains made in July and August, Gold has not been the asset of choice in 2013 and has given back some of its recent two month gains in just a few days in September. It speaks of how volatile these markets can be, but those long the market earlier in the year remembers how violent and abrupt the exodus from the yellow metal was, and any recent longs with profits made were proved wise to take them. The market has been hyper sensitive to the news to say the least. However, if the Fed keeps the current program in place and doesn’t taper along with an air of uncertainty about the Middle East still hanging over the markets, we could get a push higher still.
THE TRADE
Therefore I am proposing the following trade. The market sometimes makes its biggest move on headline day, and I am proposing on buying an October Gold call and October Gold Put, in what’s referred to as an option strangle. I will look at buying the October Gold 1290 put and buying the October Gold 1450 call for a purchase price of 6 points or in cash value, $600.00. The risk on the trade is the price paid for the spread plus all commissions and fees.
What I am looking for is an extreme move, either up or down, that will increase the option premium on either the put or call for or more than the cost of the trade and commissions and fees. It is my opinion that the market will be entering into a new trading range after the Fed has their say. It is important to note however that October Gold expiration is just a week later than the Fed announcement, so in my view the trade should be exited shortly after the fed announcement. Please call or email me with any questions or comments.
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.
