Gold Option Trade: Will Gold Continue To Consolidate?
Chris Vermeulen | Jul 06, 2014 02:50AM ET
Until recently, the world has forgotten about Gold and gold futures prices it would seem. A few years ago, all we heard about was gold and Silver futures making new highs on the back of the Federal Reserve’s constant money printing schemes. However, after a dramatic selloff in the world of precious metals it became very quiet.
Gold prices have been in a giant basing or consolidation pattern for more than one year. As can clearly be seen below, gold futures prices have traded in a range between roughly 1,175 and 1,430 since June of 2013.
The past few weeks we have heard more about gold prices as we have seen a five week rally since late May. I would also draw your attention to the fact that gold futures also made a slightly higher low which is typically a bullish signal.
At this point in time, it appears quite likely that a possible test of the upper end of the channel is possible in the next few weeks / months. If price can push above 1,430 on the spot gold futures price a breakout could transpire that could see $150 or more added to the spot gold price.
Clearly there are a variety of ways that a trader could consider higher prices in gold futures. However, a basic option strategy can pay handsome rewards that will profit from a continued consolidation. The trade strategy is profitable as long as price stays within a range for a specified period of time. Ultimately this type of trade strategy involves the use of options and capitalizes on the passage of time.
The strategy is called an Iron Condor Strategy, however in order to make this trade worthwhile we would consider widening out the strikes to increase our profitability while simultaneously increasing our overall risk per spread. Consider the chart of the SPDR Gold Trust ETF (ARCA:GLD) below which has highlighted the price range that would be profitable to the August monthly option expiration on August 15th.
As long as price stays in the range shown above, the GLD August Iron Condor Spread would be profitable. Clearly this strategy involves patience and the expectation that gold prices will continue to consolidate. This trade has the profit potential of $37 per spread, or a total potential return based on maximum possible risk of 13.62%. The probability based on today’s implied volatility in GLD options for this spread to be profitable at expiration (August 15) is roughly 80%.
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