Now that gold is rangebound, how do you make money trading it? That’s easy – treat it like a wooden pony and straddle that thing.
For the details on this trade, in more professional terms as well, check out Brad Zigler’s article for Hard Assets Investor:
So what’s an investor to do? Well, you can certainly sit tight and wait. But if you do, you’d be passing up an opportunity the market doesn’t hand out every day—cheap volatility premiums.
Option traders know all about volatility: It’s one of the primary drivers of option costs. When volatility contracts, as tends to happen in range-bound markets, option prices soften. So much so, in fact, that the purchase of option straddles and strangles becomes attractive.
A straddle is a combination of a put and a call on the same asset, each sharing the same expiration date and exercise price. A strangle is similar, but the options’ strike prices are different.
The potential risk here, at least IMHO, is if the next potential wave of deflation finally comes to fruition, taking down everything, gold included.
But if you believe that gold will be rangebound for a bit here, straddles are definitely an interesting potential play.
And here’s a VERY interesting chart that Brad posted in his piece – it shows another reason some smart money is wary of gold at these prices – because managed money is heavily in gold right now, which often indicates a shorter term top in price:
Chart courtesy of Hard Assets Investor.
Gold has had a heckuva run, it could easily trade sideways, or even pull back sharply, and still be within the confines of a larger bull market. Nothing goes straight up or down – trade accordingly!