Gold and silver tumbled down mainly during the second part of June.
A CONFLUENCE OF FACTORS
Bernanke’s press conference following the recent FOMC meeting, in which he opened the door for FOMC tapering QE3 by the end of 2013, and China’s credit squeeze potentially dragged down the prices of gold and silver.
THE NUMBERS
By the end of the month, gold plummeted by 12.12% (as of June 28th); silver, by 12.49%. For gold this was the worst performing month in recent years. For silver, this was the worst performing month since April 2013.
Recent reports revealed a sharp rise in outflow from leading gold ETFs despite the rise in demand for gold in China and India. The fall in demand for gold as an investment especially considering the sharp rally in the equity markets contributed to the decline in precious metals prices.
WHAT’S NEXT?
The question going forward is will the present trend reemerge. Gold for August delivery dipped below $1200.00 an ounce for the first time in three years last Friday morning.
However due to Friday being the end of the month and end of the second quarter, prices bounced over eighty dollars from Friday’s low as shorts in the market covered as money managers and funds covered to potentially book profits before month and quarter end.
FOCUS ON JOBS DATA
However on Tuesday, bullish momentum abated and Gold and Silver resumed their downward bias. The market now turns its collective attention to Friday’s jobs report. Surprises on report day are not uncommon, and if we see a better-than-expected number Friday, we could see a retest of last week’s lows in both gold and silver. Conversely if we see a disappointing jobs number, we could see a recovery bounce in gold back up to and through the $1300 level.
THE TRADE
It is my belief that the market could experience a significant plunge or rally given the importance of the monthly jobs data. Therefore I am proposing the following option strangle to take advantage of such a move.
GETTING IN
The trade using August gold options which expire on July 25th , calls for simultaneously buying the August gold 1300 call and selling the August gold 1340 call, and buying the August gold 1190 put and selling the August gold 1150 put.
The cost of the option strangle is nine points or $900.00, which is the risk on the trade plus all commissions and fees. What I am looking for on report day or early next week, is an extreme move one way or the other where gold futures either break $1190, or rally up and through $1300 an ounce. In either case, I will look at exiting the profitable side of the trade determined by whether where the underlying futures price moves.
What I do not want to see is sideways movement after the jobs release.
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.
