Published on 04/4/2005

James Mound explains a gold bear put spread in his Trade of the Month for April.

Mound Trade of the Month: Gold Bear Put Spread

Trade description
Buy one June Gold 420 put and sell one June Gold 400 put for a cost of approx. $400-$450. Margin and max risk is the cost of the trade. Options expire on 5/25/2005.

Explanation
Gold broke the long term arc (see recent gold article “Gold’s Pending Collapse”) and is showing signs of weakness as the dollar tests the recent highs. The market is in a mid-range looking for a clear direction, and the technicals say a breakdown in gold is more than likely. A bear put spread reduces cost, risk and margin while getting a great risk to reward ratio on a breakdown in metals without the exposure to the upside that a futures contract would create.

Profit Scenarios
Max profit is $1,600 (assuming a $400 cost) and occurs at expiration with the market trading at or below $400/oz. Profit is reduced by $100 per point above 400 up to 416 which is breakeven at expiration.

Risk Scenarios
Max risk is the cost of the trade ($400) and occurs at expiration with the market above 420. Loss is reduced by $100 per $1/oz below 420 to 416 which is breakeven at expiration.

Disclaimer
There is risk of loss in all commodities trading. Commissions and fees vary per individual and therefore are not included in profit, cost and risk scenarios. Please consult a licensed broker before you trade for the first time. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some option strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise). Past results are by no means indicative of potential future returns.

James Mound, owner of JMTG Brokerage LLC, MoundReport.com and author of the book 7 Secrets, writes the Weekend Commodities Review Newsletter. Receive your free weekly subscription to the Weekend Review by e-mail. Click here.