MTP Trade #11 2019
Gold Call Spread:
We at Minter are gold fans, and we see the market currently trading in the $1275 to $1365 range for now.
What could drive gold out of the range in the weeks ahead.
- A weaker USD
- Equity market selloff and higher volatility
- Market perception that central banks will pump liquidity and lower rates to help growth.
- Investors start to see signs of higher inflation or even increased inflation expectations.
While we believe that gold is a good long term investment and should be a part of every investors portfolio, we at Minter think the range of $1275 to $1365 will hold for the next few months while the Fed and other central banks are on hold.
To take advantage of a higher gold price into the summer, we suggest an option strategy that will benefit if our view above is correct.
Buy XAUUSD $1330 Call option Cost $13.00 per ounce 2 months maturity (indicative pricing!)
Sell XAUUSD $1360 Call option. Income $5.50 per ounce 2 months maturity (indicative pricing!)
Net cost $7.50 per ounce (indicative pricing!)
Possible outcomes at maturity in 2 months:
If gold is trading under $1330, client loses $7.50 per ounce. Between $1330 and $1337.50 on maturity, the result is a small loss.
If gold is trading over $1360, client makes $22.50 per ounce. Between $1337.50 and $1360 the client profits dollar for dollar.
Breakeven on the trade is at $1337.50
We see this as an interesting 3 to 1 risk reward.
Advantages of trade:
Client knows maximum loss ($7.50) and the trade has a 3 to 1 profit loss profile.
Disadvantages of trade:
If the market trades above $1360 at maturity, the investor will not participate in higher prices as the upside is capped.