Gold Slides Towards $1,200 But Holds 50-Day Moving Average. Trade Gold Options to Capture Volatility.

Friday’s Gold Futures Move left Longs feeling a bit queasy. For those who have been waiting for an opportunity to get Long with a tight stop, the June Gold Contract came close to its 50-Day Moving Average. If one wanted to get Long, that may have been an excellent opportunity. Unfortunately, Gold bounced back nicely from the lows and it was easy to miss the rebound. For those who are more interested in participating in the movement of Gold, in either direction, trading Gold Options may provide an excellent opportunity.

In an article on March 21st we discussed the advantages of being Long Volatility in Gold. It was a simple strategy to take advantage of movement in the underlying Futures Contract without concern for directional movement. The article spells out the key characteristics of the trade. The goal was to time the purchase of underpriced Gold Options and to either manage the change in Deltas or liquidate the trade when deemed appropriate. As of Friday’s close the Implied Volatility of Gold Options was several percentage points lower than the Historical Volatility of Gold Futures.  If Gold Futures continue to move at a rate near what it has been moving, an opportunity to profit from a Long Strangle is available.

More often than not, the feeling of traders is that the greatest likelihood of successful Options Trading is in the Selling of Options, however, the risk/reward of Buying Options can often be superior. There are so many different strategies which can be implemented depending on the Implied and Historical Volatility of the underlying that limiting one’s trading arsenal to strictly Short Options is the same as limiting opportunities for responsible risk management and profit.  In the case of the strategy for the May Gold Strangle, the Implied Volatility of the Options provides an opportunity to establish a relatively Delta Neutral position with good value. The Table below outlines the trade. It involves Buying an out-of-the money Put and an out of the money Call. When the market moves in one direction, or the other, there will be an opportunity to either liquidate the trade or manage the Deltas by either Buying or Selling Futures Contracts. Unfortunately, the best way to establish the trade is to wait until when the market is quiet and it is safe to take a leg on one of the options. As always, execution is important; do not lift offers. For those of you who haven’t been exposed to the terms described above, take a look at our Options Guide PDF. It will clarify many of your questions.

At Options Strategy Network we assist traders in understanding the essential components of Options Trading. Liquidity, Implied and Historical Volatility, the Skew, choosing the appropriate Options Trading Strategy and Risk Management are all of the essential requirements for Trading Options in a profitable manner. Contact us  to enhance your understanding of these issues. Our Private Webinar Training Sessions, for a fee of $75/hour when timing permits, will enhance your options trading. Follow us on Facebook or Twitter for timely posts.

OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

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