October Gold is unchanged this morning at $998.50 as I write. Yesterday, gold tested the $1008 price high made in February, and then fell back below $1000 by the end of the day. It is not surprising to see a pull back from those high levels yesterday and it wouldn’t be a surprise if prices fell back a ways further, but the technical ingredients are in place for prices to soar to new highs. Yesterday we tried to buy a $1010 to $1050 ratio call spread but were unsuccessful in getting filled.

For today, I recommend doing a similar trade, but this time let’s try to buy the October Gold ($1010 strike) call option and sell 2 October Gold ($1040 strike) calls at even money. If filled on this trade, then at expiration in 15 days, if October Gold is at $1010 or below, then the gross loss would be zero. We would profit if prices finish over $1010 and less than $1070. The maximum profit would be right at the middle point, $1040, and the gain would be $3000 at expiration. Above, $1070 we would lose $100 for every dollar prices finish above $1070 at expiration. I feel like this is a good trade for 15 days. Clearly, if we are in the trade and prices reach up to $1040 way before the expiration, we would probably attempt to liquidate and take whatever profits are available at that time.

The directional movement indicators are bullish and the ADX line is rising.

Sep. 9, 2009
David Hall