Playing gold’s uncertain 2014 with options

December 27, 2013 03:11 AM

With gold (COMEX:GCG14) set to post negative year-over-year returns for the first time in 13 years, many traders are positioning themselves for an uncertain 2014. During 2013, strength in the U.S. dollar and speculation around when the Fed would taper its $85 billion per month bond buying program pressured prices and sent gold tumbling from its highs made back in mid-January. With the Fed announcing the initial taper of their program at their December meeting, it is likely that gold will remain under pressure through the beginning of the New Year. However, gold bulls argue that the pace of buying by central banks could increase, and that this will lift gold prices through the second half of the year. With continuing uncertainty surrounding the future of QE and the U.S. economy, we can likely expect volatile gold prices in 2014. Amidst such volatility a trader must be very conscious of risk, and whether they are speculating on bullish or bearish moves in gold make sure to have risk well managed. Generally, options can help a trader do this. Using options spreads can help a trader stay in a trade and take away the worries of being stopped out of a position.

Using the options market, we can also calculate how big of a move market makers are pricing into options. Using this calculated move we can develop price targets. With April options implying a move higher or lower of $90.00 by expiration, we can calculate an upside and downside target of $1,305 and $1,125 respectively. With these targets we can now look at both bullish and bearish set ups.

Bullish Trade: Buying the Apr 1295-1305 Call Spread for 2.00  Risk: $200 per 1 lot  Reward: $800 per 1 lot  Breakeven: $1,297

This trade sets up with a 4-to-1 reward-to-risk ratio and has a well-defined risk level. A trader will remain in this position regardless of underlying movement and can never lose more than $200 per 1 lot on this trade.

Bearish Trade: Buying the Apr 1135-1125 Put Spread for 2.00  Risk: $200 per 1 lot  Reward: $800 per 1 lot  Breakeven: $1,133

This trade also offers bears a great reward-to-risk set up and allows them to stay in the trade through volatile markets.

About the Author

James Ramelli is the Moderator of the Live Futures Options Trading Room at where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.