Traditionally speaking Gold has been known as a safe haven. In times of distress capital flows into the physical, futures, and commodity option gold markets. On March 11, 2020, the World Health Organization (WHO) declared the Coronavirus outbreak a global pandemic. Just two sessions prior, the June 2020 Gold futures contract traded 1,707.8, a new high dating back to the end of 2012. After the pandemic declaration, instead of a continuation to higher prices, futures sold-off over 250 points or $25,000 per contract and established a new seven-month contract low at 1453.0 in just four sessions. So much for a flight to quality. Especially when you consider the steps central banks have taken. By the end of the week, however, the very same contract began a three-day rally of 230 points, or $23,000 per contract. The market has been choppy since, albeit in larger than normal trading ranges.
In today’s market climate, it can seem like there are many factors moving against you:
- There is heavy overnight trading, circuit breakers are being triggered, and futures contracts are trading to their limit up or limit down levels,
- The exchanges are requiring full margin to even day trade futures contracts,
- Margin calls are ordered to be satisfied quickly by brokerage houses through position liquidations and bank wires.
So if you can no longer rely on going long Gold as a safe bet, how can you participate in these unprecedented market moves? The answer is the three Ds of trading volatile markets: Derivatives, Diversification, and Discipline.
Derivatives of Futures Contracts: Commodity Options
Commodity options, a derivative of a futures contract, provides the ability to take a market position with a defined risk and staying power. The risk of buying an option is limited to the premium cost plus your fees.
Stop losses on options are not accepted by the exchanges which affords the position to be held through volatility and sizable trading ranges. Though due to this volatility, premium prices are currently overvalued. While options may cost more upfront, on the exit there is potential for additional profits to be had.
A recommendation to my traders was to buy the end of April E-mini S&P 2000 put for 12.00 points or $600 on March 10. The E-mini S&P market had just broken a lower support level, however that day had a bounce back session up over 130 points. The trade strategy was short-term; by purchasing a short-dated option (end of April), the cost – and therefore the risk – was kept to just $600 plus fees. After the large 270-point sell-off two sessions later I recommended liquidating the position at 45.00 points or $2,250 per option. The market did trade lower but the profit of $1,650 was a 275% return in just two sessions.
June 2020 E-mini S&P Chart
Diversification: Trading Opportunities Beyond Stocks and Bonds
Commodities provide trading opportunities in markets outside of stocks and bonds. The global pandemic is far reaching into categories such as food, transportation, and tangible goods. For example, I have recommended that my clients establish positions in:
- Copper, Natural Gas, Wheat, Cocoa, and Lean Hogs,
- Call options with expiration in May, June, and July when there may signs of economic recovery,
- Short-term puts as momentum pushes a variety of markets to new lows. Some of these markets may not recover in the short-term, however the risk of loss is limited to the full premium paid plus commission and fees.
A recommendation to my traders was to buy the July 2020 Cocoa 2450 call option for 50 points on March 24. This market may have set its bottom with a Double Bottom Formation in place. Yes, there is high demand in the food chain at this time, but this trade is based on the same formations and technical indicators as before the pandemic crisis. In times of distress it’s important to stay true to developed and tested trading strategies.
July 2020 Cocoa Chart
Discipline: Stick to Your Trading Plan
Sizable trading ranges come with hefty dollar amount changes. It’s too easy to get excited about a green number on the trading platform or discouraged by a marked-to-market loss on the nightly statement. To alleviate this, the risk per trade must be known upfront before entering into a position. More than that, the loss potential must be a comfortable level to account equity to temper emotions. On the other side, the target profit must be known upfront before entering position. If the target level is triggered, reduce the position size – or liquidate the single lot – to lock in the profit.
A recommendation to my traders was to buy the June 2020 Gold 1700 / 1750 bull call spread for 6.0 points or $600 on March 13. This position was recommended after heavy selling in the Gold futures market as discussed above. The contract traded down to the 200-day Moving Average at 1512.1, held and bounced higher. This was an opportunity to add Gold to the portfolio to capture potential profit with a momentum based move. The market did reverse higher and rallied to 1693.50 (3/24/20), near the pre-pandemic price. There was a potential profit of approximately $900 during the trading session. However, the target was not yet triggered based on the underlying analysis. Sticking to the trading plan I recommended a trade order to liquidate the spread at 21.0 points for a potential profit of $1,500. That order is still working. Gold is trading near 16.60 at the time of this writing. The risk remains $600 plus commission and fees.
July 2020 Gold Chart
Next Step: Take Action in the Futures Markets
Actually there is a fourth and fifth D: Don DeBartolo. Consider working with me as your trading partner. As your personal broker I provide all services to fit your trading needs whether you are a neophyte or professional trader:
Whether you are making your own trading decisions, seeking my expert advice, or following an independent advisory service, I will provide prompt and accurate trade execution. With Broker-Assisted Execution, I will serve as your contact from the development of the trade plan to the execution of the strategy, along with any trade or market-related questions in between.
Maintain total control over your futures and commodity options trading decisions and execution. With Self-Directed Online Execution, you trade directly on an online trading platform. I will serve as your trading advocate, available to assist you with technology troubles or market-related questions. Learn more about our dt Pro trading platform.
I can offer you a combination of the two as well. Contact me directly at 1.312.706.7616 to have a conversation to best fit your short term objectives and long term goals. Read more about me and my services at https://www.danielstrading.com/dondebartolo/about.