Gold (COMEX:GCG14) ended a 12-year bull run in 2013 after posting the largest annual decline for the metal since 1981. After such a bearish year, traders and investors are beginning to position themselves for what can be an uncertain year for gold futures in 2014. Uncertainty surround the tapering of the Fed’s quantitative easing program could still weigh on gold prices. With gold futures currently trading around $1,241 analysts at major banks are expecting a sideways to down year for gold.
UBS, HSBC, Barclays, Bank of America and Deutsche have all come out with their 2014 forecasts for gold prices, and it seems that they are expecting a lackluster year for gold. The average of the banks forecast says that gold should trade on average round $1,200 an ounce this year. Some analysts are implying much lower prices, but the consensus seems to be for a choppy, slightly lower year for the precious metal. So how should traders be playing a potentially choppy gold market this year?
We will look at a strategy known as an Iron Condor. This type of strategy is profitable when the underlying trades within a range. This strategy also takes advantage of time decay, putting the clock in a traders favor. Here we will look at a nearer-term trade, but this position could be reestablished after each expiration using new measured move targets.
To set up this trade we first must calculate upside and downside targets. With April gold options implying a move of around $67.00 by expiration, we can use this to calculate an upside target of $1,312.00 and a downside target of $1,178. Using those we can set up a trade.
Trade: The /GC 1170-1175-1315-1320 Iron Condor for $1.90 Net Credit
Reward: $190 per 1 lot
Risk: $310 per 1 lot
Breakeven: $1173.10 and $1316.90