October Gold is down $9.10 per ounce at $986.80 this morning as I write. The expected pull back in price for gold has begun. The directional movement indicators are bullish and the ADX is rising. I want to find a place to get more bullish on gold soon. Followers of this letter should be lone one October Gold from $964.00 and short the October Gold ($960 strike) call option from $18.50 and long one October Gold ($930 strike) put option from $17.00. There are 14 days left until expiration. We are looking to hold this position as is until the expiration date. In the mean time, yesterday we attempted to buy the October $1010 to $1040 ratio call spread for even money but were unsuccessful in filling the order. For today I have two recommendations.

First, for the short term, I recommend buying one October Gold ($1045 strike) call option and sell 2 October Gold ($1060 strike) call options at a 50 cent credit. In this trade, if at expiration in 14 days, prices are at $1045 or less then the options will all expire worthless and we end up with the 50 cent credit. If prices finish over $1045 then we make $100 for every $1.00 per ounce prices are above $1045, with our maximum gain coming in if prices finish right at $1060, and that would be a gain of $1500. Breakeven on the top side would be at $1075.50. For every dollar per ounce that gold finishes above $1075.5, we lose $100. So, in this trade we have a wide range to make money in, and only lose at expiration if prices finish over $1075.50 within the next 15 days.

The second recommendation for today is to go further out into the December contract. December Gold is currently trading at $992.30. I recommend buying one December Gold ($1110 strike) call option and selling 2 December Gold ($1175 strike) call options at a credit of 50 cents. In this trade, if filled, if prices at expiration finish below $1110 then all the options will expire worthless and we get to keep the 50 cent credit which is $50. If prices finish above $1110, then we make $100 for every dollar price finish above $1110 until we reach our maximum potential profit at $1175, which would be $65 per ounce or $6500. The breakeven on the top side would be a finish at $1240.50 per ounce. Every dollar per ounce gold is above $1240.50 at expiration, we lose $100. My expectations are for a large gold rally going into the end of the year, so this wide swath of profit range is what I am looking for.

Sep. 10, 2009
David Hall