) -- Gold has been doing a fantastic job of holding the line and is consolidating around 1125 on the February futures contract. I think it will head higher again.
First, gold saw dramatic declines in the last two weeks. Given the run this market has had over the past few months, it is not surprising at all to see this type of wipeout.
These moves typically shake out all the weak longs and present a wonderful buying opportunity for bulls and those looking to add to long positions.
When you then see all the pundits on TV talking about how the move in gold is over, you know the market is then going to proceed higher once again.
The other thing I have found interesting is that gold has held its current price in the face of a stronger dollar over the past few sessions.
This tells me gold wants to go higher, because gold and the dollar typically move inversely to one another.
Here is how to participate in the next leg higher while limiting your downside risk:
: For those with low risk tolerance, one can simply participate by purchasing a call option.
I recommend the April 1250 call. It can be purchased now for approximately $2,200. The maximum risk on this trade is the premium paid for the call.
Should gold decide to continue its ascent, this call will increase in value accordingly. It has 99 days until expiration, and therefore allows the move some time to develop.
If the upward move does not develop in the next 30 days or so, one can sell the call back to the market and recoup some of the premium paid.
: The puts in gold recently have been quite "juiced" following the selloff of the last couple weeks. I recommend selling the February 1050 puts for $900 or better.
This position has unlimited risk down to zero, so one must be nimble in closing the position should gold prices fall further.
However, the position can realize a profit if gold moves higher, consolidates sideways, or even moves slightly lower. It has 41 days until expiration.
Risk disclosure: Past performance is not indicative of future results. The risk of loss in futures trading is substantial and such investing is not suitable for all investors. An investor can lose more than the initial investment.
-- Written by Matt Zeman in Chicago.
Matt Zeman is a principal with Lasalle Futures Group and chief market strategist for Time Means Money.Com.