Gold Futures?
So with the current economic climate I'm wondering if now is a good time to buy some calls on Gold futures.
The way I see it the economy can go one of two ways. One is up with increases in commodity prices fueled by speculative money and higher demand in BRIC and n-11 countries. Under this scenario gold is an inflation hedge that has seen it's traditional ratio with silver being disrupted by the rise of silver use in electronics production (namely semiconductors). Gold may bounce back as cotton prices and wheat prices start to filter into the broader US consumer market.
The other scenario I see is continued international shocks (such as we are continuing to see in Libya) that are fueled by global imbalances, rising commodity prices, or uncertainty in bond markets. If we see any of a number of black swan events (unlikely but catastrophic scenarios like a municipal bond retrenchment, a contraction of federal fiscal policy, Eurobond defaults in Spain, another flash crash in the US equity markets) that could trigger an end to one of the largest boom stock markets in recent history, which has already seen markedly lower volumes. Here gold would be a flight to safety that would see a sudden spike rather than a gradual uplift due to inflation, but it would still be profitable.
Does anyone with experience in options trading have anything to add? On the economics side is my analysis of the two possible scenarios inclusive, or are there other realistic stories that could be in play?
I'll give one bump before this falls off the main page. I was really hoping for some insight into this.
I don't know how much money you are willing to put up but a gold mini future would really cash in if you are willing to absorb the risk. Sell front month calls(1 or 2 depending on your strike price) to reduce your margin. If you sense extreme volatility which may be the case you also can go long a GC mini, buy a put and sell a call all in the same front month. what you are looking for here is the put to save(reduce) you from a margin call if you enter the long GC at the wrong time. You sell the call to reduce your margin because the put WILL be expensive. the moment the market pulls back you buy the call @ a profit and wait for a bounce to sell the put. If you hold all three positions until expiration your profit will be the diff between your long future and sold call so sell the call at a wise strike price. Ideally you want to ride only the gc mini contract off into sunset with a handsome profit.
Good luck trading!
edit: had a late night typo in there, my fault.
Wow...that's a lot to take in. I was simply thinking of buying a few calls.
Hahaha, Buying straight options is the quickest way to the poor house my friend. Without volatility in the underlining future/stock your basically dead in the water due to time decay.
I'm not sure I understand. You can make straddle calls that bet on the underlying moving (ie picking up volatility) but if you think an equity is going to go up in value, GLD for example, why not just bet on the upside?
No sweat Sama, I'll explain it. Buying outright calls on gold futures is pricey(high risk) due to volatility. You would ideally want to buy as close to the money as possible because you have a short term time frame. Due to that you will have to pay up a fat premium. If your wrong and gold nose dives $20 in a day that call you bought (depending on your strike price) will get crushed due to time decay. Unless you can stomach seeing your account dwindle until the market reverses you more than likely will have to take the loss on the chin. You will liquidate out of fear like everyone does. Plus your risk of loss is 50/50 per say, truly not even that good. So I'm attempting to help you minimize your risk while increasing the odds of winning in your favor. All while having you immune to a volatile market. One way to do that is buy a gold mini contract and put up margin $$. You sell out/deep out the money calls to reduce you intial margin for the position. The premium you collect for selling the call will automatically be deducted from GC mini contract margin. Ideally you can sell calls until you fully pay for the gold contract. If the market pulls back the loss your taking on the future contract will be off set by the profit on calls that your making. Thats a covered call. Or you can do a collar spread. Go long GC mini contract, buy a put, and sell a call. The put is for safety because gold is a violent market, so you buy it for protection...but because GC is so volatile option sellers will want for you to to pay up a fat premium to get that protection. So you sell a call far enough away from your strike price to collect a great premium and reduce your cost of the position. With a collar spread this is what you want to happen BEST CASE scenario. Gold spikes up then pulls back. You buy the call back @ a profit. Now you are Long a future and short the put. The market gets close to your put price you sell it for profit. The market reverses and you clean up on the long future. Your timing must be immaculate for the trade to play out that way. IF the market doesn't pull back far enough for you make a profit on the put the profit from the call will offset your loss on the put somewhat. Now you ride the future to the upside. What's also great about this strategy is you can lock in a return. This is how....If gold expires ABOVE the call strike price you will get called out your spread by the exchange. You will collect the difference between where you went long the future AND where you SOLD the call. You instantly just increased the chances of winning but using great risk management. When trading your primary concern is taking a loss(risk management). Once you "x" out the ways to fail if your wrong only better winning choices remain. IMO buying an expensive call in a volatile market is too close to purely just rolling the dice.
If I need to break it down further let me know. Good luck!
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