Higher Dollar, Stock Market Fear makes Gold Strangle High Payer for Option Sellers
Back at the beginning of December, the we advised selling gold calls with the rational that gold prices would have a hard time moving substantially higher in light of a Fed Rate hike (amongst other reasons.)
*If you missed this piece, it remains relevant and you can read it on the blog at www.OptionSellers.com/golddec
We still feel that gold calls can offer investors some attractive premium in Q1 2016. However, a new development has opened up a second premium opportunity in gold.
The development is fear. And the opportunity now is, in our opinion, on both sides of the gold market.
If you’re swallowing hard and buying the S&P, you may be right, you may be wrong. But there are easier places to go to butter your bread this month.
In this week’s article, you’ll learn how writing strangles in the gold market can not only keep you well out of the money, but safely away from the stock market and all of the carnage it wreaked last month.
Fear Runs Rampant
In a market so dependent on how the investing public feels, CNN Money publishes a daily stock market indicator called the Greed/Fear index. It goes from 0 to 100 – 0 being the most extreme terror any investor can feel towards the market and 100 being Gordan Gecko inside an inflatable “jumpy room” filled with $100 bills.
At the time of this writing, the index was at an 8. According to CNN, this indicates “extreme fear.”
If you follow Buffet philosophy, you’re buying stocks here. But that can take some pretty big kahunas. You don’t have to stand on that ledge and decide whether to jump, however. Extreme emotion can open up opportunity in a variety of places. You don’t have to face down Vader in a winner take all, “pick the bottom” kind of macho last stand.
This is money making. It doesn’t matter where it comes from. If you’re swallowing hard and buying the S&P, you may be right, you may be wrong. But there are easier places to go to butter your bread this month.
In our November piece, our outlook was that the expected Fed rate hike would keep the dollar somewhat firm and keep a lid on Gold prices. Thus, a call selling approach was suggested.
Thus far, such an approach has proven successful. However, with the recent volatility in equities, and its resulting spike in the fear index, gold could now have limited downside as well.
Why? Because historically, gold has been a place to run when trouble rears its ugly head. And in case you haven’t noticed, the head has been reared.
We don’t expect gold prices to spike – at least until the current stock meltdown gets a lot lot worse. (Notwithstanding, UBS, in its unsettling warning to investors last month, advised buying gold as a hedge against a potential 30% “correction” in equities in 2016).
…volatility in the gold options is surging. This is a custom made recipe for strangling the market.
Our take is that a weakened global economy, nearly non-existent inflation and the US dollar remaining the “best of the worst” will keep the Nervous Nelly Gold bugs from pushing prices too far up the chart.
But volatility in the gold options is surging. This is a custom made recipe for strangling the market.
If you are experienced in selling stock or index options, a strangle works the same way in commodities. You sell a call above the market, you sell a put beneath it. The difference is you can sell both the call and the put at deep out of the money strikes. Commodities leverage alone allows this luxury. However, the elevated public interest (and its resulting volatility) in gold makes even deeper out of the money strikes available.
June 2016 Gold
Recent volatility in gold now makes selling a wide strangle possible.
Conclusion and Strategy
As stock market volatility has spilled over into gold options, option sellers can now take advantage of public interest by selling deep out of the money puts and calls in gold. For self directed investors, I suggest considering the June Gold 1280/950 strangle for total premium of $1,000 or better.
That means selling June Gold 1280 calls for roughly $500 each and selling June Gold 980 puts for roughly $500 each. The trade should provide both a wide profit zone and good time decay over the next 30-60 days. For investors looking to be even more conservative, wider spreads are available in the further out months.
For a million dollar portfolio, selling 50 brings in $50,000 in premium this month. Gold can do a whole lot of different things and still see them expire worthless. It’s not a jackpot, of course, but it can serve as a balm to help soothe any recent stock market wounds.
These are the type of accounts we’ll be positioning in a variety of gold strangles and spreads this month aimed at taking in some of the hefty premium now available in the gold market.
If you’re interested in learning how to work with us in this kind of diversified investing, you can request our free investor discovery pack now at www.OptionSellers.com/Discovery
2/8/26 – Editors Note: In light of the upward swing in gold prices, we are adjusting recommended strikes in this trade to the June 1400 calls and 1050 puts.
***The information in this article has been carefully compiled from sources believed to be reliable, but it’s accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.