Clive Maund
gold, silver, & oil shares
THE GOLD BREAKOUT - NYMEX STRADDLE OPTION STRATEGY AFFORDING MASSIVE LEVERAGE (updated 29 Aug)...
originally published August 27th, 2009WARNING: the following trading strategy should only be implemented by those subscribers with the appropriate level of knowledge and experience, and only after consultation with your qualified investment advisor in your area of jurisdiction. Options are risky investments and you should only invest an amount in these instruments which you can afford to lose.
With gold coiling into the apex of a large Triangle that has been forming for 6 months and in addition having been stuck in a giant trading range for almost 2 YEARS it is clear that a breakout is imminent which should lead to a big move. While the move is expected to be to the upside towards $1300, there remains some danger of a breakdown, particularly given the seemingly unfavorable COT picture. On the other hand gold sentiment among market timers as per Hulbert has become very bearish in the recent past, which is a strongly bullish sign. A scenario that we have been open to for some time is a brief sharp breakdown that shakes out longs and enables shorts especially Commercials to cover and reverse position followed by a powerful, potentially explosive upside breakout.
If ever there was a time for a Straddle option position in this market this is it, and the great thing is that with careful selection of contracts you can position yourself to make potentially very large gains for a relatively small capital outlay. The idea behind the Put side of the Straddle is more to cover the cost of the Calls than to make money although the Puts selected here are now cheap so they should do more than cover the cost of the Calls in the event of a sudden plunge. Leverage on both sides is high - for example, if gold goes to $1200 before the expiry of our October 1200 Calls, then you stand to make well over 100 times gains. On the Put side, the October 900 featured here would turn into a 40 bagger in the event that gold were to plunge as low as $800. While we certainly don't expect gold to drop that far even in a worst case scenario, it's nice to have that level of protection and leverage. Traders should not be concerned by the relatively near-term expiry of the options featured here - there is simply no need to put yourself on the line for much larger time value losses and also reduce your leverage by buying more distant expiries when the probability of a big move soon is very high.
A somewhat bizarre anomaly of this market is that the quoted months actually expire several weeks earlier than the listed expiry month would indicate, resulting in a situation where, for example, the October series expire in September. This means that the September series Puts recommended in this article when it was first posted are unworkable, being very close to or even at expiry, which explains why they were/are ridiculously cheap. Nevertheless, these options are still viewed as a great way to play the imminent big move in gold. Enquiries are being made to establish the exact expiry dates of the October through December series options and also the codes to be used in trading these counters.
Gold Straddle
The following Nymex gold Calls and Puts have been selected because they are comparatively cheap in relation to other contracts and also afford excellent leverage....
Nymex Gold Calls:
October 1100 at 0.80 (+0.10) still attractive. The Dec 1100 at 8.70 is nearly than 11 times as expensive as the Oct 1100.
October 1125 still attactive at 0.50 (no change)
November 1075 at 4.50
Nymex Gold Puts:
October 900 at 2.30 (-1.40)
November 900 at 7.20 (-2.40) and 890 at 5.40 (-2.00)
It is a matter of personal preference depending on your individual situation and your outlook on the market how much you invest in these options. The quantities of Calls and Puts purchased will depend on what funds you have available for this purpose and on the prices available on the Call side and on the Put side.
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The above represents the opinion and analysis of Mr Maund, based on data available to him, at the time of writing. Mr Maund's opinions are his own, and are not a recommendation or an offer to buy or sell securities.
Mr Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports. As trading and investing in any financial markets may involve serious risk of loss, Mr Maund recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction and do your own due diligence and research when making any kind of a transaction with financial ramifications.
Although a qualified and experienced stockmarket analyst, Clive Maund is not a Registered Securities Advisor. Therefore Mr Maund’s opinions on the market and stocks can only be construed as a solicitation to buy and sell securities when they are subject to the prior approval and endorsement of a Registered Securities Advisor operating in accordance with the appropriate regulations in your area of jurisdiction.