Option play in gold

By Matt McKinney

Gold (COMEX:GCK14) prices are right were I want them now and this article will explain why I like to sell call options in downward trending markets on up days. Fundamentally, every time the economy here in the U.S. starts to take strides forward it seems as though gold prices start to move lower. Does that explain why the market has fallen about $115/ounce in about 14 trading days? Consumer confidence is getting better. Housing numbers are on the rise. Janet Yellen says she will continue to taper claiming in a roundabout way that the economy no longer needs help from the FED. Payrolls have risen. Service industries have expanded and finally the stock market has reached record levels recently. This coupled with the rapid fall in gold prices tells me that traders don't have too much fear and the "risk trade" is on, while safe havens are not needed. Technically, I have placed my favorite technical indicators on this daily June gold chart. Why are these my favorite? For the simple fact that by placing a handful of indicators on a chart, I can learn 10 or 15 important specifics. These technical indicators are the 9-, 20-, and 50-period Simple Moving Averages (SMA's), the Bollinger Bands (light blue shaded area), Candlesticks (red and green bars where each bar represents a day), and Volume (bottom graph).  The first element that grabs my attention on this daily June gold chart below is the phenomenal collapse over the last 14 trading days. This is a perfect example of a market on a chart that looks like it took the staircase up and then jumped straight out of the window to the ground. This is how a "Super-Trend" down happens, which is where gold is now on this June daily chart below. The term I have coined "Super-Trend" or in this case, a "Super-Trend" down, occurs when first, the 9 day SMA (red line) falls quickly and crosses down and under the 20 day SMA (green line) and this happened on around March 25th as you can see on the chart below. Next, I look for both the 9 and 20 day SMA's to point lower, the sharper, the better. Finally, I need the market price itself to trade below the 9 day SMA (red line). At first, this occurred immediately putting gold in a "Super-Trend" down right off the bat. At that point for the "Super-Trend" down to stay in play the 9-day SMA must act as solid and consistent resistance. It started that why on March 25 and has continued until today, April 3. Also the bottom line of the BB's (light blue shaded area) has acted as great support. It is my opinion that this will continue for some time, this "Super-Trend" down. Clearly, there is some serious downside momentum to this market, to the point that some would say we are oversold. I'm not so sure of that, in fact it looks like the market is about to test the 9 day SMA (red line) to see if it is real resistance and if this "Super-Trend" down will continue. I say it will hold as resistance. Remember no technical indicators work 100% of the time and this is just my opinion based on my favorite technical indicators on this daily gold chart. Only time will tell where we go from here. Option Play Since, I am now bearish on this market there could be several ways to play this market with options and one could be to buy straight put options or bear put spreads in a 3 to 1 ratio with a call for a hedge or "insurance" in case the trend changes on a dime and the market rallies. Another potential play could be to sell naked, deep out of the money June options or option spreads with very clear cut exit strategies upon entering the trade for risk management. Remember, when you sell naked options you have unlimited risk and should have a "well-funded" account of risk capital also. The reason this gold market is right where I want it for this strategy is because markets can only do 1 of 3 things over any given period of time and that is go up, down, or sideways. The gold market will move lower to sideways as opposed to making a huge rally up over the next 2-4 weeks.

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