It’s tough, if not downright impossible, to predict the direction of gold prices right now.
Moves of 10% or more – not just in the price of gold, but gold stocks – have become the norm.
This excessive volatility points to investor indecision about the direction of prices, combined with huge amounts of fear or greed.
Unwilling to miss a rally to the upside, investors are jumping on shares the minute they see a strong move higher, magnifying the size of the move.
[ad#Google Adsense 336×280-IA]Meanwhile, short sellers, and sellers in general, have been mercilessly pounding prices lower.
Case in point: The XAU Index of mining stocks is down more than 50% from its highs.
You might think that makes now a terrible time to invest in gold… but it’s not.
To the contrary, it’s actually the perfect time.
That’s because there’s an options strategy tailor-made for this kind of volatility.
And it can deliver two, or even three times your investment in a relatively short period of time.
Here’s how it works…
A Stranglehold on Profit
The strategy is called a long strangle.
You execute a long strangle by buying both an out-of-the-money put option and an out-of-the-money call option on the same stock.
A put option is a bet that the shares will go lower and a call option is a bet that they’ll move higher. “Out of the money” means that the option’s strike price isn’t near the current price.
So if you bet in each direction, you’ll profit no matter which direction the stock moves. It just has to move. If the price stays static, then the likely result is a loss. But that’s why now is the perfect time to exploit this strategy.
The gold market is so volatile right now, that inertia is the least possible outcome. You can reasonably expect a sharp move in one direction or the other.
Here’s an example using Goldcorp (GG).
Goldcorp shares have traded in a 52-week range of $22 to $47. The current price is $31. If you were to execute a long strangle, you could buy a put option with a $25 strike price expiring in January 2014 for $1.14 and a call option with a $38 strike price and January 2014 expiration for $1.10.
If shares moved significantly higher, over $40 per share, you’d double or triple your money.
That is, if shares moved to $43, you‘d make $5 per contract – less your cost and the cost of the put option, which would lose value. If shares plunged below $20, you’d have the same type of returns, as well, making money on your put position, but losing money on your call position.
Better still, you could make money on both options if the market were to exhibit extreme volatility.
Let’s say, for instance, that the shares soared in the short term and you were able to sell your call options and book the profit. Well, you’d still be holding on to your put options. And if the shares tanked, you could make money or recoup some of your investment on a downside move.
The point is, you‘d have much less money at risk – just what you paid for the call and the put – and still be able to generate huge returns on your investment, regardless of the direction of prices.
So don’t fall victim to volatility. Profit from it.
And “the chase” continues,
Source: Oil & Energy Daily