MoundReport.com's Trade of
the Month
Gold Call Ratio Spread
James Mound
JMTG's Head Analyst
Jul 27, 2004
Trade description:
Buy one October Gold 400 call and sell two October Gold 420 calls
for a cost of approx. $150. Margin is approximately $350 above
cost but can fluctuate depending on time value and market price.
Options expire on 9/27/2004. The trade is intended to be about
$10 out of the money on the long option side, so adjustments
should be made to meet market price action prior to entry.
Explanation:
After trending up to 410 from the lows of the recent trading
action, gold has seemingly lost its momentum during a US dollar
surge. Analysis would indicate that the dollar is merely at the
upper end of a long term trading range, and lacks any true indicator
of future price movement on the technical side. This provides
a good entry into a trade that offers bull gold players a technique
for trading gold to go up without ideal entry point timing, and
without large exposure to further downside movement. The upside
to ratio spreads are the low cost and high potential for return
on investment. The downsides are the unlimited exposure it creates
and the need for successful end result timing to maximize returns.
Alternatively, a slightly more expensive bull call spread would
offer risk averse traders a better play here, but significantly
more cost.
Weekly Gold Chart Courtesy of Gecko Software's TracknTrade
Profit Scenarios:
Max profit is $1,850 (assuming a $150 cost) and occurs at expiration
with the market trading at $420/oz. Profit is reduced by $100
per point below 420 down to 401.5 which is breakeven at expiration.
Profit is reduced on the upside by $100 per point above 420 up
to 438.5, which is breakeven on the upside.
Risk Scenarios:
Max risk is unlimited. At expiration loss is $100 per cent above
438.5. Loss is $100 per point below 401.5 to 400 (max loss to
the downside = $150).
Jul 27, 3004
James Mound
JMTG's
Head Analyst
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Disclaimer:
There is risk of loss in all commodities trading. Commissions
and fees vary per individual and therefore are not included in
profit, cost and risk scenarios. Please consult a James Mound
Trading Group Broker before you trade for the first time. Losses
can exceed your account size and/or margin requirements. Commodities
trading can be extremely risky and is not for everyone. Some
option strategies have unlimited risk. Educate yourself on the
risks and rewards of such investing prior to trading. James Mound
Trading Group, or anyone associated with JMTG or moundreport.com,
do not guarantee profits or pre-determined loss points, and are
not held monetarily responsible for the trading losses of others
(clients or otherwise). Past results are by no means indicative
of potential future returns.
______________
Reprinted at 321gold Inc
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