??????Until there is a change in the downward momentum of the U.S. Dollar, commodities will most likely continue going higher. Check the Commodity Research Bureau Index for useful guidelines on commodities. Crude oil, gold and silver offer many alternative options trading opportunities. Recently silver has been the best performing, but now looks quite extended so we suggest using gold, which is in an orderly well-defined uptrend.
However, if the Federal Reserve makes comments or suggestions that it is about to increase interest rates or halt further purchases of Treasury securities there will be rush for the door and gold could go down quickly. Remember, gold does not earn interest or dividends and costs money to store and insure.
Subject to the risk above, here is a trading suggestion.
SPDR Gold Trust (NYSE: GLD) 146.74. This trust holds physical gold, not gold futures contracts.
There is a well-defined uptrend from the January 27 low of 127.80 touching the March 15 low of 135.23 and the April 2 low of 137.72. At the current rate, the slope is 5 points per month. Watch for any breach of this trend line on news about QE2 bond purchases ending in June, asset price bubbles, or an increase in interest rates. Use a close below the trend line, now at 141, as the exit.
The current Historical Volatility is 11.92, while the Implied Volatility Index Mean is 14.08 with an IV/HV ratio of 1.25, with a bullish .45 put/call ratio. Thursday’s options volume was 169,937 contracts compared to the five-day average volume of 234,150.
| B/S | Qty | O/C | USym | Exp | Strike | P/C | Price | IV |
| B | 1 | O | GLD | Jun | 148 | Call | 2.86 | 14.76 |
| S | 1 | O | GLD | Jun | 155 | Call | 1.02 | 15.91 |
| Dr | 1.84 |
Occasionally we suggest selling puts with long call spreads to add delta or direction to the position as well as increasing the volatility edge. This time however, we do not suggest adding the put before the Federal Reserve Open Market Committee meeting on Tuesday and Wednesday, since any signal that they are about to change policy could cause GLD to decline five or more points in one day. We think the more prudent course is to have a defined risk position with a 1.84 point risk with a potential gain of 5.16, for a 2.8 risk to reward ratio using a defined SU (stop/unwind) at a close below 141 to further reduce the risk.
The suggestion above is based upon last Thursday’s closing prices using the mid price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
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