Ahead of Fed's event, gold appears to be pressurized. Yes, Fed's liftoff is almost certain next week but how does it do is the tricky part.
Analysts may already began breaking heads on the logistics of raising rates in the presence of a large and the likely behaviour of both short-term and longer-term interest rates post-lift-off.
Gold for February delivery on the Comex division of the NYMX shed $2.70, or 0.25%, to trade at $1,073.80 a troy ounce during U.S. morning hours.
Yesterday gold eased up $1.20, or 0.11% finding support from the weaker US dollar as market players braced for the first U.S. rate hike which was due from last a decade.
So tension lingers ahead of crucial economic event, if you think the prices of this precious metal are to spike up further, then cover your underlying exposures with collars strategy.
Gold futures rallied to 7 week highs today amid growing expectations that the will hold off on hiking interest rates until 2016.
When above fundamental reasoning bothers your trade sentiments, this strategy is for those who have this commodity exposure at present who are concerned about a correction and wish to hedge the long spot currency position.
How do you do that? Well the hedger takes following positions to construct this strategy:
Write an OTM call option + hold an ITM put option (near month Call & mid-month put). Writing OTM calls may likely to fetch certain returns since any abrupt slumps in near future may be taken care by this instrument.
This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put. Thereby, any declines in this commodity would be taken care by ITM put options since the holder of the put option will have right to sell at predetermined strike price at expiry in case of American style options.