Gold has been shining brightly, but is the rally almost over?
James Cordier, president and founder of Liberty Trading Group, joined Breakout from Tampa, Florida to offer some contrarian thoughts on the screaming gold rally of the past year. The options trader sees the most precious of metals peaking in short order, saying this rally is in "the ninth inning." Cordier is using a classic options strategy to take advantage of other traders' aggressive bets on gold either collapsing or moving even higher.
While he doesn't see a gold rollover as today's business, Cordier is selling calls at the $2,100 and $2,200 levels above, and selling puts under $1,000. It's a play options traders call a "strangle," as it's a bet the price will be constricted between those two prices for the duration of Cordier's contracts. Here's how it works: Cordier gets to keep the premium he collected when selling the options short if gold stays within his range, meaning the puts and calls would both expire as worthless. If gold spikes above $2,200 or below $1,000, Cordier could theoretically get vaporized. He won't, because good options traders, like all good investors, have an exit plan. But the risk needs to be noted for those looking to go into the options-shorting business.
Gold is currently trading right at a nominal all-time high of $1,500 an ounce, up about 30% in the last 12 months. For comparison's sake, silver, the other half of the glitter twins, has gained over 160% in the same period. For the record, Cordier says silver is destined to hit $50 an ounce (the all-time dollar high) but thinks the metal has a "down $10 day" in front of it at some point. That's too much volatility even for an options master like him.
Those looking for a primer on sophisticated options strategies should watch the video and, as always, let us know what they think, either in the comments section below or via email at BreakoutCrew@Yahoo.com.