Clive Maund
gold, silver, & oil shares
iShares COMEX Gold Trust straddle strategy...
originally published August 30th, 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.
It is understood that a number of subscribers are interested in taking a straddle option position ahead of the gold breakout but are not in a position to do so via the Nymex. So here is an alternative. You will see that the 2-year chart for IAU is very similar to the charts for gold and for SPDR Gold Trust (GLD). As with gold itself and GLD, IAU is fast approaching the apex of a Symmetrical Triangle, meaning that breakout must occur shortly. The fact that all three are pushing towards the apexes of their respective triangles greatly increases the danger of whipsaw action, meaning a false breakout in either direction followed by a sudden reversal in the opposite direction. While our view is that the most likely such whipsaw will involve a breakdown followed by a breakout to new highs, based in part on the current COT structure in both gold and especially silver, the reverse could occur. Should the down then up scenario occur then it could work out well for straddle holders who may get the chance to sell the Puts for a quick profit that covers the cost of the Calls, and if we then see a reversal to the upside, it's a free ride. The reverse could prove to be equally efficacious although at this point the up then down scenario is considered a lot less likely. The Put side in this can also be used as insurance to protect long positions elsewhere in the sector.
A suitable straddle would be a combination of the October 95 Call at 1.95 and the October 90 Put at 1.70. The more adventurous may also consider the October 85 Put at the low price of 0.40 although it would clearly take a big drop for this to move into the money. The equivalent Call has a strike further away and is more expensive.
A similar strategy can be employed in SPDR Gold Trust (GLD) where any long positions MUST be protected by options to guard additionally against the possibility of it cratering due to possible accounting or inventory irregularities, which cannot happen with gold itself, of course. Note that this is just a precaution and does not imply suspicion of any malfeasance at GLD.
iShares COMEX Gold Trust website
iShares COMEX Gold Trust, IAU on NYSE, closed at $93.90 on 28th August 09.
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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.
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