Thursday, April 21, 2011

Like a Broken Record: "Gold Rally Almost Over"

If you listen to the so-called experts and pundits, it was all over around $400, $600, $900, then $1,000, then $1,200, and $1,400, and everywhere anywhere in between those numbers, and $100, $200 correction is imminent.

Here's the latest broken record, from James Cordier, president and founder of Liberty Trading Group, courtesy of Yahoo Finance's "Breakout":

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.

It's rather a big strangle. Mr. Cordier expects the price of gold to remain within that range ($1,000 to 2,200), and that's supposed to signal the "9th inning" and the end of gold rally.

Now you're warned. Yet again.


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