After a long period of declining prices, we finally saw a significant bounce on gold futures over the past few days.
The option expiration on gold for April futures options is tomorrow, March 26, and the market rallied right up to that nice round number of $1200.
Here's the question I ask myself is: Is this a good place to sell? Is this just a bounce/short covering and the trend lower will resume?
Is this rally a beginning of a breakout to the upside and trend reversal?
Only time will provide the correct answer, but until then, I think the following two strategies are worth looking at:
- Sell futures right around the $1200 level and place a stop on the short along with another stop to go long if market breaks above $1207 ( see chart below)
- Sell call option premium on rallies and sell put option premium on sell offs as we take the assumption that the market will be trading between $1140 and $1245 for the next few weeks. Selling premium is a dangerous strategy with unlimited risk. Read more about options and writing premium here.
As I dont see any major changes in the fundamental picture for gold, I like to use the chart and technical studies in an attempt to come up with a good risk -reward trade.
Gold Daily Continuation Chart (Heikin-Ashi)
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