As I write this, the March gold contract is trading around 1607, down more than 3% on the day. This downward pressure is coming from central bankers who need to raise money by the end of the year but can’t sell off their debt (bonds)—and all they have left that’s liquid is gold. I’m bullish gold long-term, so when I see the market breaking like this, I see an opportunity to get in.
Over the course of the last year, we’ve been down around this 1600 level a few times and gold has rallied back. But right now, I don’t want to be long the future—too much risk. So I called in an expert, Greg Hadley of Bull & Bear Institute, to give me a position using options where I can get the exposure I’m looking for.*
Greg suggested the Condor, both for its wiggle room and for its high risk-reward ratio. A Condor is when you’re long one option, short another, short a third and long a fourth. The spread is netted out, so no matter what the market does, you know your risk and your reward at all times. That’s very important.
Gold has been in the 1600-1800 range for a while now. I have an upward bias, and I’m targeting the 1700-1800 range—with this spread, we don’t have to be perfect, just close. We need a little bit of time to work, so we’re using options on the April gold contract (metals have different liquidity than indices).
The trade: Buy a 1700 call. Sell a 1750 call. Sell an 1800 call. Buy an 1850 call.
The cost (approximate): Buy the 17 for $54. Sell the 17-half for $40. Sell the 18 for $30. Buy the 18-half for $22. So we’re paying $76 and selling $70, which means the net cost of the spread is about $6.
The risk-reward: If the market hits anywhere between 17-half and 18, I’m looking at about an 8-1 return—that, my friends, is high-probability trade. If the market heads south, I’ve only paid $6 for the spread. And the nice thing about a position like this is that, although it can be managed (and you know me, I manage every position), I could also let it run.
If you’re looking for long exposure to gold, look no further than this strategy. It’s a fantastic trade, and another in the long list of reasons that the educators and curriculum at BBI are the best around. In fact, I thought this was such a fantastic trade that I asked Greg for a strategy for the S&P futures contract. But if you want to hear the details of that, you’re going to have to listen to today’s podcast!
*Trading futures and options involves risk. Do your own homework and understand whether trading futures and options is right for you.