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If you think 2011 has been a crazy year for stocks, you're right. As of today the S&P500 has traded in a 27% range and somehow ended up within striking distance of unchanged for the year. Nutty stuff unless compared to the moves in precious metals. Gold has traded in a 45% range and silver has yo-yoed 85% with an end change roughly in-line with that of the S&P.
While precious metals prices seem random, explosive, and unbearably tense for investors using more traditional "long or out" strategies, for traders in the options pits the volatility in 2011 was like having 12-months of Christmas.
At least that was the case for traders like James Cordier, founder of Liberty Trading Group. Cordier says the catalyst behind gold's over 9% decline in less than a week of trading as "just a little bit of nervousness" exacerbated by relative illiquidity, at least compared to earlier in the year.
Courtier sees a "decent" outcome in Europe. He says Germany and China have way too much to lose with a failure and will, as a result, take a cue from the U.S. and print money like counterfeiters on speed.
If this were a story problem in a Finance 101 course (at least if such courses were had practical value) readers would have all the information to answer the question: "How would an options trader take advantage of what he believes to be fleeting skittishness in a bullish long-term environment?"
Those of you who answered "Sell puts" go the head of the class. With gold trading near $1,600 Cordier is "selling $1,200 put strikes in April gold." The potential gain depends on where the puts are trading at this moment but the shorthand is this: If gold closes over $1,200 in April the puts you're short drop to zero and you make 100%. If Gold goes below $1,200 or increases in volatility over the next four months your losses could be roughly "enormous."
In silver the volatility is even higher which isn't surprising as investors continue to come to grips with the rip to near $50 earlier in 2011. Cordier is taking advantage of the fear bump by "selling with both hands on silver puts at $17 an ounce". For those puts to close in the money silver would have to need to drop well over 40% in the next 4 months.
Based on his calls on Breakout earlier this year, Cordier knows what he's doing and obviously has years of experience. Selling puts and calls is decidedly the deep end of the pool in terms of both calculations and the people on the other side of your trades. There's money to be made trading options but you don't get it for free.
In other words: Do your homework and make your trades on paper before putting your money on the line.
What's your strategy on the metals for 2012, either in options or more vanilla strategies of being long or short ETFs? Let us know in the comment section below, on Breakout's Facebook page or Tweet me @Jeffmacke.
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