A Bearish Play on Gold

05/29/2014 8:00 am EST

Focus: OPTIONS

Comex/Globex gold had the lowest close in 15 weeks, breaking out of a bear pennant formation, and Matt McKinney of Zaner Group, offers a couple of bearish option plays based on this trend.

Fundamentally, the news is that some billionaire has been elected in the Ukraine and he is more than willing to work with Putin diplomatically.

Technically, I have placed my favorite technical indicators on this daily August gold chart. Why are these my favorite? For the simple fact that by placing a handful of indicators on a chart, I can learn 10 or 15 important specifics. These technical indicators are the 9 (red line), 20 (green line), and 50 (blue line) period simple moving averages (SMA's), the Bollinger Bands (yellow lines), candlesticks (red and green bars), where on this daily chart each bar represents a day, and a bear pennant.

The most important item that I notice on this is that the market did what my technical told me it would do, at least for now! The market broke out of this technical formation the way it came in...down. In a big way in fact. Comex/Globex gold had the lowest close in 15 weeks as it broke out of this bear pennant by more than $25/ounce to the downside. This to me is just the start of something far more bearish.

Remember no technical indicators work 100% of the time and this is just my opinion based on my favorite technical indicators on this daily gold chart. Only time will tell where we go from here.

chart
Click to Enlarge

Since, I am now bearish on this market there could be several ways to play this market with options and one could be to buy straight August put options or bear put spreads in a 3 to 1 ratio with a call for a hedge or "insurance" in case the trend changes on a dime and the market rallies.

Another potential play could be to sell naked, deep out-of-the-money August options or option spreads with very clear-cut exit strategies upon entering the trade for risk management. Remember, when you sell naked options you have unlimited risk and should have a "well funded" account of risk capital because there are margin requirements as well.

The reason this gold market is right where I want it for this strategy is because markets can only do one of three things over any given period of time and that is go up, down, or sideways. I believe that the gold market will move lower to sideways as opposed to making a huge rally up over the next 30-45 days.

By Matt McKinney of Zaner Group

Related Articles on OPTIONS