In the last two trading sessions, gold prices have dropped dramatically – as of this writing $GLD is down over 12% (151.05 on 4/11/2013 to 132.05 intraday on 4/15/2013).  Speculation runs rampant as to what has caused the drop in gold prices, gold stocks, gold futures, and all things gold. Some blame the drop on Cyprus selling gold, some on China’s slowing economy, while yet others suggest that the American Tax Day (4/15/13) has something to do with the drop in gold prices.  However, the sell-off has not been restricted to gold alone, but also silver and other precious metals, and, at this point, has reached panic proportions with everyone dumping their gold and silver stocks and ETFs.  While it is understandable that people panic – for savvy investors and stock options traders, this is a ‘golden’ opportunity.  And, to quote a phrase, one ‘should never look a gift-horse in the mouth’!.

GOLD stocks and ETFs fall – panic selling!

HOW TO PROFIT FROM THE DROP IN GOLD AND SILVER PRICES

If today’s chart is any guide (stockchart courtesy VectorVest), it seems that panic selling is sweeping across the globe.  Whenever panic drives the stock market, implied volatility of stock options sky-rocket as the demand for options to hedge stock or ETF positions increases. In the last two trading sessions, the implied volatility for the 30 to 60 days options on $GLD and $SLV has jumped, resulting in high call and put premiums. Not surprisingly, the broader markets have also shown a bearish outlook (Dow: down 1.04%, Nasdaq: down 1.57%, and S&P: down 1.38%), although not as significantly as the $GLD (down 7.79%) or $SLV (down 9.53%) – all intraday today.

Prudence dictates that one should wait for the panic selling to stop and enter the market only when the gold and silver stocks or ETFs stop falling or a turnaround occurs. There is always a trade-off between risk and reward, and each has to make their own decision of when to enter a trade that has a profit potential acceptable for the risk undertaken.

OPTIONS TRADES TO CONSIDER        

If one wishes to take an aggressive and bearish stance, and expects a further fall in gold and silver prices, one should consider a debit put spread (at-the-money versus out-of-the-money [OTM] depends on how far one expects underlying to continue to fall).

If one wishes to take a less aggressive stance, one can wait for $GLD, $SLV or other underlying to stop dropping, and then open a Put Credit spread below the recent low price.  This trade will be profitable as long as the underlying stays above the short strike price.  Depending on how much profit is desired versus risk tolerated, one can go out-of-the-money and ‘out in time’.

For the long-term trader, another trade that may be considered is an OTM call butterfly, which will profit as the underlying rises over time and implied volatility collapses. However, one has to have a bullish outlook at the time this trade is put on, as it will only be profitable if the stock rises.

Please note that the above comments are not recommendations for trading $GLD or $SLV and readers are responsible for their own trading decisions (see fine print disclaimer). I have used $GLD and $SLV as examples to demonstrate how one might use current news items to generate profitable trades.  Be sure to always only trade liquid options on liquid stocks, so that you can exit the trade quickly if the stock moves contrary to one’s expectations (see Why Liquidity is Important). Create a plan before you enters the trade (see How to Trade Stock Options Online).

Happy Trading!

Discover how you might have seen the gold meltdown coming!