Sell Gold Puts Before Bernanke Speaks

by Michael Shulman | August 24, 2011 2:34 pm

Federal Reserve Chairman Ben Bernanke is speaking at the annual Jackson Hole conference, and enough people in the market believe he will say something that will suggest he will do another round of quantitative easing. As a result, the market has moved up and now sideways.

Bernanke is boxed in. He has already said he will keep interest rates near or at zero for at least two years, which tells traders two things: The economy is quite weak, and if you want to make money, buy assets other than Treasuries. The market traded down on the comments on the economy, then traded up on a silly hope he will say something that creates some liquidity for an already liquid market.

Bernanke will probably use some words or phrases that give traders hope he will ease some more. He also will reiterate his real worries about the economy.  And, frankly, who knows how the market will react?  I don’t.

But that doesn’t mean trades aren’t out there. What makes most sense is to play it carefully — rather than buy calls or puts that willmove with Bernanke’s words, one should sell puts on gold.

I know, I know — gold is now broken, it’s done, the gold trade is ending, the geniuses and gurus have spoken.  Maybe for a week or two – but what about Europe and the deficit and debt debate and the double dip we are almost in — and the double dip that will hit Europe even harder?

The strategy is to pick a fair price – I like gold right now but you may want to shoot lower, perhaps the $1,650-an-ounce level (it’s currently at $1,756), and sell an October put. By that time, Europe will be again debating — and failing — to resolve its debt crisis and the savage fighting on Capitol Hill will have resumed full force.

Specifically, I like the $165 price level on the SPDR Gold Shares (NYSE:GLD[1]) exchange-traded fund as the vehicle to sell puts against, which presents a sturdy technical support level. In my Options Income Blueprint, I recently recommended selling a weekly put at $170 but it may continue to correct before we see a turn.

Even if you ignore this idea, stay away from buying options in and around Bernanke’s speech. The market can make no sense of itself right now and when traders are hoping for words about what might happen, well, it is a tough environment to risk capital. Sell that risk to someone else.

Endnotes:
  1. GLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLD

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