Gold/Silver – Use options to play a short covering rally

What a volatile week it's been with the month and quarter ending after a downgrade of Apple stock sent retail stock investors scrambling for the exit signs and the British Pound falling to a record low against the Dollar. The U.K. government presented a fiscal spending plan that could put the next round of U.K. inflation through the roof. At the same time, the Bank of England admitted its first policy mistake and is in a state of "panic" that requires the need to deliver 175-200 bps in rate hikes over the next two meetings. Bringing it back to the U.S., Fed Fund futures are pricing in a 50/50 chance of another 50 or 75 bps rate hike at the next Fed meeting. That leaves traders wondering how long before the Fed admits its policy mistake of tightening too far into a recession.

The aggressive tightening of monetary policy in the U.S. has created a strong bid under the U.S. Dollar that will keep pressure on Gold and Silver for the time being. Unfortunately for precious metals bulls, the labor market's strength is the glue that holds the Fed's foot firmly on the rate hike pedal. The only thing that can stop the Fed is both inflation and the labor market showing signs of cooling, which could provide a sharp setback in the Dollar, leaving way for a massive precious metal short-covering rally

How to play these markets?

I cannot reiterate enough that there is a possibility that the Fed will continue to tighten while all of Europe lags in its efforts. However, if the Fed pivots, a short covering rally could unfold. I have found that it is best to use a calculated risk Options strategy in deeply oversold markets that haven't solidified a technical bottom. An options bull call spread is a trading strategy aiming to capitalize on an increase in a given market or asset during times of high volatility or for counter-trend trades. The option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap your max loss if the price of an asset drops. However, the strategy also limits the potential gains in case of a price increase. Bullish investors often use this when trading futures as a calculated risk debit spread.

February 2023 Gold Options Trade

We use the February 2023 Gold futures contract in this bull call spread example. We are buying 1 February Gold 1750 call at $45 as our long call. We then simultaneously sell 1 February Gold 1850 call at $22 as our short call. This action creates our premium, which is $23. We then multiply that by $100 to account for Gold's multiplier (a 100-ounce contract) to get $2,300, or our total premium paid (plus any commissions or clearing fees).Knowing our premium paid, we can calculate our potential max profit simply by taking the difference in our strike prices ($1850 – $1750), which in this case is $100, then we multiply $100 by $100 because this is a futures contract. That gives us a total of $10,000 as our max gross profit, minus our

January Silver Options Trade

If you prefer Silver, we are looking at a year-end strategy that involves buying 1 January Silver $19.00 call at 120 cents as our long call. We then simultaneously sell 1 January Silver $19.75 call at 95 cents as our short call. This action creates our premium, which is 25. We then multiply that by $50 to account for Silver's multiplier to get $1,250, or our total premium (plus any commissions or clearing fees).

Knowing our premium paid, we can calculate our potential max profit simply by taking the difference in our strike prices ($19.75 – $19.00), which in this case is 75 cents, then we multiply 75 by $50 because this is a futures contract. That gives us a total of $3,750 as our max gross profit, minus our $1,250 premium, leaving us with a max net profit of $2,500 (less any commissions or clearing fees). If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

By Phillip Streible

Contributing to kitco.comweek's low of $1,622.20. Wyckoff's Market Rating: 1.5.

December silver futures bears have the firm overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $20.00. The next downside price objective for the bears is closing prices below solid support at the September low of $17.40. First resistance is seen at this week's high of $19.045 and then at $19.40. Next support is seen at Tuesday's low of $18.295 and then at $18.00. Wyckoff's Market Rating: 2.5.

December N.Y. copper closed up 670 points at 342.55 cents today. Prices closed near the session high today. The copper bears have the overall near-term technical advantage. Prices are in a four-week-old downtrend on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at the September high of 369.25 cents. The next downside price objective for the bears is closing prices below solid technical support at the July low of 315.55 cents. First resistance is seen at 350.00 cents and then at 355.00 cents. First support is seen at today's low of 330.55 cents and then at this week's low of 324.30 cents. Wyckoff's Market Rating: 2.5.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley