Earlier today we sold the October Gold ($980 strike) call option at $13.00 and higher for some clients. Now take a look at the enclosed chart. You will notice that gold took a price drop since earlier this morning and the red and green directional lines are converging rapidly. They are still bullish, but I want to take even more protection now. I recommend using that premium that we sold this morning and use it to buy the October Gold ($930 strike) put option at $17.00. Here is what our position will look like once filled:

Long one October Gold from $961.70, long one October ($930 strike) put option from $17.00, short one October ($960 strike) call option from $28.00 and short one October ($980 strike) call option from $13.00. If we hold this position until expiration in 46 days, here is what the results would be at different price levels assuming we make no new changes:

At $930 or lower — a loss of $770.
At $940 ————–a gain of $230
At $950————–a gain of $1230
At $960————–a gain of $2230
At $970————–a gain of $2230
At $980—————a gain of $2230
At $990————–a gain of $1230
At $1000————-a gain of $230
At $1010————-a loss of $770
At $1020————-a loss of $1770.

So you can see that the trade that I have on now limits the downside risk if gold sells off. From about $940 to about $1000 there is a gain, and then if prices go over $1000, losses start to mount. The strategy I mentioned earlier today was to buy back the $980 short call if prices go over $980, so we aren’t planning on taking that unlimited risk if prices get over $1000 because we begin to exit the extra risk once prices hit over $980.

Keep in mind that it is very probable that this position will be adjusted in the days and weeks to come.

Aug. 10, 2009
David Hall