Time to Buy Gold Call Option Spreads
Thursday, June 26, 2008
by Ira Epstein of Ira Epstein & Company
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6-26-2008 The link to my "Mid-Day Videos" videos is below. http://www.iepstein.com/videos_start.aspx Starting this week, I will begin recording interviews with many of the best know market technicians in the Futures Markets. Free trial subscriptions to their newsletters will be included. Jake Bernstein of MBH will be my guest tomorrow. Due to my time constraints, I will not be able to write on Silver today. Rather, I will focus on Gold. The Seasonal Low in Gold now looks to be in place... Last week I headlined this Weekly Metal Report with this headline; "The Rally This Week Is Important to the Longer Term Picture". As it turned out, last week did in fact set the stage for what I term near term low confirmations in both gold and silver. The Fed misses an opportunity I have been using the term "Stagflation" often lately since I see the US economy as being in a slow downward spiral while inflation in food and energy is dramatically moving higher. CPI as used my most US economists typically discards food and energy, something that most of us that eat, heat our homes and drive cars know needs to be addressed. Wages have not yet moved up to keep up with the energy and food cost spiral. This has provided the Fed with the freedom to say that labor costs, a key element of inflation are not in an inflation environment. They're right since job loss continues. Keeping one's job right now seems more important to many than making more money. The Fed also announcement implied that the economy had avoided a recession. I don't think so but frankly, terms don't matter. What matters is that the Dow Jones Industrials are down to 2006 levels. General Motors is at a 53 year low. Energy prices are back up to all time highs and grain and metal prices are soaring. Even the lowly Japanese Yen made dramatic gains against the Dollar today. I often make mention of the "Yin-Yang effect, when major market reports come out. This is because the initial reaction in the USA is often not the true reaction to a major Economic Report. This is due to the impact of the report having little chance to be fully taken into account in Asia or Europe until their next respective trading days. This is because contra to what many think, traders do sleep. When those traders are not in their offices, the impact of reports here often takes a while to take hold there. The Fed did what the markets thought the Fed would do by standing pat. However, the Fed had a chance to use verbiage to put the market on notice in a much stronger way than they did about stating the Fed's concern on the value of the Dollar and the need to soon raise interest rates. Stronger verbiage is what was needed. The end result of not doing so was the decline in the Dollar and the impact the falling Dollar had on commodities today. The simple fact is that many of us believe that the Fed is not in position to raise interest rates just yet. What the Fed did, probably knowingly, was take on the role of a trader as their announcement predicted that inflationary pressures would soon begin to abate, which implied too many that interest rate hikes in the near term need not or were not going to occur. The result of their announcement is what took place today. The Gold Seasonal Story For weeks on end I have been displaying a Seasonal Gold, provided to us by the good folks of Moore Research Center...http://www.mrci.com/ As readers of this report know I have been predicting for a long time that gold would bottom out in early July and move higher into year end, with the "Fall Months" being the most likely time where prices acceleration would take place It appears to me that the bottom has been skewed forward by just a bit with today's rally. Not much of a skew, but just a bit as I now believe that the most recent low(s) are now major correction bottom lows that need not be soon seen again for a long time. Let's look at a Seasonal Chart of Gold.
Last week I said that "the ensuing break into the end of June, should it develop, is where I wish to establish a long term position. If my analysis proves correct, I think new all time highs in gold will be hit before year end." OK...I was off by 2-weeks in terms of long term market timing as I now have reason to believe that the early July low, occurred this week. Remember the above chart is a compilation of both a 34 and 14-year study. Skewing forward a bit is no big issue. Therefore, until we have reason to believe otherwise, I would treat the most recent break lows as the end of the downside correction. As such, I look for new all time highs to come into play. Weekly Gold Chart Let's depart from our normal charts and look at a Weekly Gold Chart. 
As you can see, on the Weekly Chart Gold is about to hit the 18-Week Moving Average of Closes, the "red-line", which is the first important resistance point. The "trade pattern" is now one of higher highs. This currently will remain in place until prices get back under $871.3 on the Weekly Chart. Therefore the trend is up and the next immediate upside objective is the white Bollinger Band, displayed on the chart as $985.3. December Gold The problem in getting long after a rally like today is one of Dollar risk. Should my analysis prove wrong, how much you have at risk is very important. The second issue is one of "risk-reward". What reward do you get for risking a certain amount of funds? The last issue is one of cost. At what cost can you get involved for trying to catch a longer-term trade in Gold? Lets start out by looking at a Daily Chart of December Gold Futures 
The pattern is one of the chart making "higher-highs", prices being over the 18-Day Moving Average of Closes (the "red-line") and now having an overbought condition on the SSTO (Stochastic Study) with a reading of 76.11. Anything over 70 in Stochastics is considered overbought unless Stochastics embed, which they haven't begun to do. More on that next week. Is the market a bit ahead of itself? Probably. The math that Bollinger Bands use is based on an algorithm that uses 2-standard deviations from a mean, which in plain English translates to this. Mathematically speaking, prices should only 5% of the time trade above the Bollinger Band. In addition, when you see Stochastics overbought at the same time that prices are over the Bollinger Band Top Band, prices often stall out or correct a bit. The most recent high on this chart is $948.3. If that high is taken out I would expect prices to surge to at least $1027. I derive this objective by taking the current trading range, which I label as having a trading top of $948 and a trading bottom of 869. That gives us a 79 Dollar trading range. If I add $79 to the top of the trading range, my objective is $1027. In the longer-term, if Crude Oil moves toward $175 as I believe it will, Gold at $1027 will simply look cheap. At some point Crude Oil pricing will begin to influence Gold. As long as the Dollar stays range-bound, that time is sooner rather than later. 
Last week I said to get ready to put on Gold Call Spreads. At that time I thought you would have until early July. That no longer looks to be the case. The spreads I am recommending below will require patience to hold onto. Those buying these should not be concerned about the daily grind of up and down prices, at least early on. Later we must as the premium you pay will eventually decay if an upward movement in prices does not take place as I think it will. These spreads are meant to be held onto for a while. If my analysis is wrong, you may lose most of the premium you pay to own them. However, your risk is limited to what you pay and no more. On the other hand....... if I am right, the reward could be very substantial. Here is a matrix of Gold Spread make up by one of my company's broker's, Mark Pasek, who can be reached at 1-800-284-1065 
I like the 1000/1025 Call Spread for a cost of $550. If you use a Broker at IECo your "All in Cost" which means commissions, exchange, NFA and other fees is $660. If you make your own decision and don't use a broker, you costs will be lower. In addition I like the 950/1000 Call Spread for a cost $1500 and an all in cost of $1610. Both of these strategies require Gold to be higher in late November, as December Gold Options expire on November 20, 2008. There are 147 days left until expiration.
I receive a lot of questions on how I use Stochastics in my price analysis. I teach how I use them in my trading course called The Futures Academy. I've created a short video that explains my teaching style. In the video I speak about The Futures Academy and the indicators I use in my trade analysis. You can click on the image below if you are online or simply type the link address below the video image into your web browser. 
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Disclaimer: This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is taken from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures and Options on Futures trading involve risk. In no event should the content of this market letter be construed as an express or implied promise, guarantee or implication by or from Ira Epstein & Company or Shatkin Arbor, Inc. that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future
Recent articles from this author
- Is the break in Gold and Silver a "Buying Opportunity"? - Thursday, July 17, 2008
- Energy....the New Currency? - Thursday, July 03, 2008
- Time to Buy Gold Call Option Spreads - Thursday, June 26, 2008
- Short Covering or More in Gold and Silver - Thursday, June 05, 2008
- Gold and Silver...short sales? - Friday, May 30, 2008
About the author
In 1984 Ira Epstein & Company was founded by Ira Epstein. Ira was a highly successful retail futures broker, having mastered TV to showcase his talents, which in turned helped Ira develop and create a very large customer following. Many of you may remember his TV show "Stocks, Options and Futures", which was one of the most popular Finance Television shows on what was then called The Financial News Network, which is now known as CNBC. Ira showcased his talents in many other TV markets as well, including Los Angeles where he was a regular guest on KWHY-TV as well as WCIU-TV in Chicago, where he was on the air for nearly 20 years. Ira Epstein...the man behind Ira Epstein & Company Ira's background...written by Ira I was born in Chicago in the mid-forties. A War Baby. Graduated High School in Park Ridge, Ill and went on to college. I obtained my Bachelor of Science Degree from Arizona State University, majoring in Marketing and Economics. I completed courses toward a Masters Degree and attended John Marshall Law School in Chicago. When in Law School, I needed a part-time job. While my family helped with my schooling costs, they simply could not carry the continuing financial burden of Law School. I needed a job. Ira discovers the Futures Market One day I found myself looking for a job on the Law School's Bulletin Board. I noticed a job offer for a "Runner". I had no idea what that meant, but I was thin and in good shape. Ready to run. Few people outside of Chicago knew at that time, 1969, knew much about the Futures Markets, including me. I applied for the job and was hired at G.H. Miller & Company. They were a clearing firm at the Chicago Mercantile Exchange(CME), specializing in the trading of Eggs and Broilers...chickens. Turns out they were pretty good at what they did. So I began running. Orders were phoned in by brokers to Miller's trade desk on the exchange floor. My first job was to "run" the order into the appropriate filling broker. I had a knack for it, but have to tell you that running wasn't really allowed. Just fast walking. Very fast walking. I also became the designated employee to take Polaroid Pictures of the chalk boards. No computer boards on the exchange back then. Rather, the exchange had employees who used chalk to write on blackboards the price a trade took place at in the order they were called up to the chalkboard writer. It looked very very chaotic, but it worked. As the blackboard filled with prices, those boards were handed down to ground staff who took Polaroid photo's of them to both track official pricing and provide member firms with trade records. The boards were than washed and put back up. My job was to take pictures of the boards or photo's of the pictures themselves. Fun times. All the while I was still in Law School. School began late in the afternoon and the markets back than ended at 1:00 P.M. I was burning the candle from both ends, studying hard, writing legal brief and whatever. Who cared. I was young and eager. I found myself liking the market. Really liking it. I was fortunate to find that making contacts with "important people' in the business was easy on the exchange floor. In fact, many of the owners of trading companies you know of quickly became influential in my life. Keep in mind that basically I had "nothing", and here I was talking and soon socializing daily with multimillionaires. I remember making $35 a week gross, owning 6 shirts and 3 pair of pants. all specific to work. My boss, Gil Miller continually told me I was being overpaid given the education I was getting. It was mind boggling, but true. Promotion and more... In a very short time promotions began. First to Order Taker and than to running part of the trade desk. I became very good at it and was assigned to one of Gil Miller's largest clients. His name was Ray E.Friedman. I worked as his personal trade deskman. Ray later sent his son to Chicago to learn the business. I shared a small office with his son, Tom Dittmer for quite a while. Today you know that company as Refco. I found Law School less and less appealing. I'd made a lot of friends and acquaintances early on at the exchange. I was never bashful and constantly asked about the markets. I needed to learn and who better from than the pro's. I was surprised at how helpful some were. Leo Melamed, the founder of the IMM division of the Chicago Mercantile Exchange and Barry Lind of Lind-Waldock offered solid advice early in my career. They were always there, answering all my questions. I watched these men, what they did, how they did it and followed my closest mentor, Gil Miller into the unknown. My parents at that time were convinced Futures Brokers were professional gamblers. The big event... O.K. Here I am watching everyone getting rich but me. It looked so simple. I had to try it. After all, I was on the trading floor, in the thick of things and couldn't miss. I had a few months of learning under my belt and "knew" how to do it. I won't bore you with all the details. You already know how it turned out. My family gave me some funds they really couldn't afford to lose. Market went against me, I had no stop, the market was of course "wrong", but I had lost more than I had in the trading account. All in but a few hours. Quite a feat. Had no way to pay it back. In panic I even resorted to calling my college roommate, pleading for help. His dad said he'd come to my aid...partially, but couldn't cover the whole loss. After exhausting all my resources, which didn't take very long, I came to the dreaded realization that by the morning my goose was cooked. I could not cover the debit and was in deep trouble. I couldn't let that happen. Late in the day, that tragic day, I walked into Mr. Miller's office and asked to speak with him. We sat down and he began talking about my progress. I didn't know if he knew about my debit or not. I then, practically choking to death, broke the news to him about the debit, hoping for some mercy. His reaction surprised me. He got up and asked me to follow him. I did. He showed me his personal shower, his sofa, stereo equipment and asked how I liked his office. I of course told him I "loved it" and was so thankful for the opportunity he had given me. He smiled, went to either his drawer or a closet, I forget which, brought out an old hotplate and handed it to me. I must've thought he was giving it all to me. Well, he said something like, "I'm glad you love it. You now live here. You can use the shower and sleep on the sofa. Be out when I get to work. Now go to work and pay me back". I ended up living in that office for a bit of time. I do mean living...not just working. One of the best times of my life. By the way, looking back on it, I know he knew before I ever walked into his office, about the debit. Did I say I also got a raise? Maybe he liked how I handled myself in terms of being honest and addressing the situation head on... or maybe he knew I couldn't afford food after my trading fiasco. I quit Law School. Had to. Didn't have the funds to continue, owed too many people money and frankly found something I had really had a passion for. I turned my attention full time to the markets. I registered and became a licensed broker. Back then there were no exams to become a broker. No studying. You simply signed up at the front desk of the exchange, listing your name, social security number and an address on a white legal pad. You were a broker. How things have changed. The rest of the story... I worked for several years both on the trading floor and up in the office as a registered broker. I discovered I had a knack for marketing, but wasn't the best trader. I knew enough to go looking for help. I learned a lot from the "old-timers" in the building, and there were plenty of them. They never seemed to go home. I remember spending literally hundreds of hours in Barry Lind's offices. I found traders everywhere. They saw I was interested and many took the time out to teach me trading disciplines. I wish there were space to name them all. In any case, I think of them often. Eventually my turn came. I had a membership at the Chicago Mercantile Exchange. My dream had come true. Or had it? The rest of the story... I vividly recollect my early dreams. I, probably like many others before me envisioned my life in the trading pits as something very different than it turned out to be. Being a runner, phone clerk and customer's broker was one thing. Trading in the pits another. It didn't take long for me to discover I liked trading outside of the pit way better than in it. The screaming and intimidation when I was trying to buy or sell a few contracts, while watching the multimillionaire trader next to me offering hundreds of contracts on the other side of the trade can shake the strongest of wills. Needless to say, I didn't stay long in the pits. As it turned out, that was a smart move for me. Skipping forward.... For 15-years I honed my talents at G.H. Miller & Company. I developed strong marketing and trading talents, which enabled me to develop and build a large retail client base. My business eventually grew too large for G.H. Miller & Company to handle. When that happened it was Gil Miller who setup my move to Shatkin Trading, with partners Hank Shatkin and Pat Arbor. Pat was recently past Chairman of the Chicago Board of Trade and Hank is one of the most well known and liked traders at the CBOT, running a large floor trader operation. The rest is simply history and my other accomplishments...well there's been a lot. Ira Epstein & Company continues to flourish and grow. What makes us unique is how quickly we adapt to change and embrace technology in the market place. I can't emphasize enough the word "we". The staff at Ira Epstein & Company is dedicated to our clients. Our staff realized that to survive, one has to evolve. We do just that. However, along this ever changing trip, we stay fixed on who we are and who we service. The Futures Academy Life has changed a lot since I began in this business. One of the things I notice is that because of technology, specifically the Internet, personal contact is lost. When I was trying to learn trading, I could knock on doors and speak with seasoned traders. That can't be done today. Most traders now have computers at home, making long hours at the office a thing of the past. There's a void that needs to be filled. Win or lose, you the client pay commissions to trade. I'd rather take the commission out of winning trades than add them to losing trades. I have no "Holy Grail". No get rich quick system. What I do have is a trading discipline that I believe in and that can be easily taught. Years ago I learned that most good traders are disciplined. They work off a checklist. That list can be written or innate. A few years back I co-authored a book called, "The Psychology of Smart Money". The premise was a comparison of professional traders versus amatures. We looked for differences in each group. What we found was profound... and obvious. The pro's had discipline. They worked at maintaining their discipline. The average trading client, the amature, had little or no discipline. Rather, they often just took "shots" in marketplace, to often because "someone told them something". Not the best laid plan. Many amatures just wanted some market "action". The list goes on and on. I hope this doesn't hit home. If it does, it's simple to change and yes, you can still have the "action". The Futures Academy teaches a simple 5 step approach to trading. You must have a computer and Internet connection. We teach over the Internet, using a "live virtual classroom" where you and your mentor work privately together. No need to worry if you miss a classroom. We work around your schedule. No matter what your profession in life is, the odds are someone was looking over your shoulder when you first began. It's rare that one becomes a plumber, hair stylist or whatever without first becoming a "Journey Man". As a Journey Man you had a supervisor. That supervisor looked over what you were doing, to be sure you were doing it properly. That's how you learned in school. Your teacher did not pass out books at the beginning of a semester and say I'll see you at "final exams". Rather, they went through the books with you. The books had chapters. An order to each chapter. That's how The Futures Academy teaches trading. Each step builds on the next. You should take a look into it if you want to learn a disciplined trading skill. In any case, you now know something about Ira Epstein & Company. You'll find that some things don't change. We'll work hard for your business. Good luck and good trading to you. Ira Epstein
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