A while back I mentioned how I thought gold was ready for a big move and had a bias towards the bullish side based on longer term charting. I also mentioned the GLD 100 January Calls which at the time were trading around 4.00 . Now they are trading near 5.60 or close to 50% higher.
I expect them to trade even higher than that during the month of September.
Most of the time in my opinion options are a bad idea unless you can devote full time to them and maybe even work with professional options trader for cues. There are just too many ways in which options can go wrong. And there are too many factors that can go against you, with one of the biggest ones being time decay.
Time decay means your timing has to be spot on otherwise you will keep losing ground in the price of the option the closer you get to expiration.
Anyway, some people like options. Personally I can’t stand them because I think there are better ways to play the market with similar returns to options but without the hassle of time decay and other factors.
That said, once in a blue moon options can be a worthwhile trade.
The reason I mentioned the GLD 100 January Calls Back on the 3rd of August 2009 was because I felt we were coming into a very unique breakout type scenario in the gold price. I thought it would happen sooner, but here we are in September 2009 and it appears to be in full force now.
So the question is when should these GLD 100 January calls be closed out?
My thinking is that they should be held for most of the month of September as I believe the breakout that is happening now will continue for the rest of this month. At some point there will be a correction that could retrace a good portion of the breakout and it would not make sense in my opinion to hold those calls during such a correction.
The best way to maximize profits on the GLD 100 January calls is when volatility is at a maximum and they are in the money (above 100).
I don’t know what the price of gold is going to be at the end of September, but I think it is worth holding the GLD 100 January calls towards the end of September to find out. That might be an ideal exit point. I suspect the price of Gold may be at 1100 at that time, but I may be too optimistic.
I don’t believe adding to a position is a good idea after an initial trade setup was established. Normally I never do that. The ‘buy’ was really at 4.00 in early August 2009. Now the calls have more volatility premium built into them and are already 50% higher.
Ultimately I think the gold price could be close to 1250 by January 2010. It may get there sooner than that depending on how involved the intermittent corrections are. So if gold gets to 1200 before mid January, then the GLD 100 January calls could be worth close to 20.00 per contract, which would be a 400% return.
That would be an outstanding trade. But the ‘safer’ exit is probably near end of September which would avoid the sweat of going through the intermittent corrections.
It is going to be very interesting to see where the gold price is by end of September!