Here Is the Trade I Was Talking About..

OK. We know that we are heading quite a bit lower. There will be a dramatic up day here or there but we will ultimately go lower before we bottom out. Puts are a really good idea to make money right now.

Another good idea to make money involves some of the ultimate underlying trends out there. One of the big underlying trends out there is that the central banks around the world are flooding the market with trillions of dollars of liquidity to help solve this crisis. There is a significant amount of fear in the market. The economy is not getting better any time soon. Those are pretty safe assumptions. So how do you make money. Here is a suggestion.

Hedge funds have been liquidating positions as fast as they can and they have been selling anything that had value to raise cash. Included in the selling is the entire commodity space. One of those commodities that is taking a beating unfairly is gold. This is the traditional hedge when things get hairy in the market. The problem is that gold has been one of the victims of the forced selling along with the whole commodity complex. In the next couple of months, when people have completely given up on markets and all the forced selling is over, gold should go back to its traditional position of an inflation hedge. To make money on this trade, you need to be early.

The way to do this is to use what I call a "corner trade". To do this you buy the highest-strike call option with the longest maturity. In this case, you would buy the Jan 2010 gold ETF (GLD) calls at $145 strike. The total cost would be $195 per contract right now. The GLD ETF trades at 1/10th of the price of gold. That means gold would have to get to $1,500 for the option to be in the money. It sounds unthinkable right now, but remember we were over $1,000 per oz. not too long ago.

I have seen predictions for gold as high as $3,000 per oz. within the next 18 months. That might be a little aggressive. Let's say it gets to $2,000 per oz. by Jan 2010. That puts these calls in the money by $500. This means a $195 investment goes to at least $500 with a conservative $2,000 price target on gold. I like the small capital outlay with a trade like this. You can get some huge potential upside with very little risk.

What if gold actually goes to $3,000? Does making 5-10 times your money sound good? I think so. You keep your overall risk low and your profit potential high. That's my kind of trade. Have a safe trading day. It looks like we go lower. Until next time, stay low risk.