Gold (GCZ25) and silver (SIZ25) futures prices extended losses overnight into Wednesday after both metals suffered major losses on Tuesday and saw their worst routs in many years on concerns the rallies had run too far, too fast.
Gold futures prices at one point were down over $250 an ounce, while silver saw prices down over $3.50 an ounce. The general marketplace at mid-week will continue to pay closer attention to gold and silver markets, as more extreme volatility could cause concerns about market-making efficiency and even market dislocations — which could spill over into selling pressure in other commodity futures markets.
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Gold, Silver Have Become ‘Gunslinger’ Markets
The daily price volatility in gold and silver has become so extreme that both bulls and bears could be forced out of the markets in the same trading session, due to major whipsaw price action.
For those gunslingers still willing to trade the gold and silver markets straight away, the micro and mini gold futures are the way most should do it.
Even trading the smaller-size contracts during such volatile market activity can be very risky. However, the smaller-sized futures contracts allow traders to access the markets with lower capital commitment.
Micro gold (GRZ25) futures from the CME Group (MGC) represent one-tenth the size of a standard 100-ounce Comex gold futures contract, meaning each contract is for 10 troy ounces of gold. The smaller size translates to significantly lower margin requirements, making them ideal for new traders or those with smaller trading accounts. With a smaller tick value (10 cents, which equals $1.00, meaning a $1.00 move is $10.00 in value), micro gold futures offer less financial impact from price movements, which makes them a useful tool for testing trading strategies or managing smaller-scale portfolios.
How to Trade the Highly Volatile Metals Markets with Options
Purchasing put or call options on gold and silver futures allows the trader to precisely know his risk outlay, which is the price paid for the option. The downside to trading options on futures in highly volatile markets is that “implied volatility” in the options is also high — meaning you’ll pay a higher premium for the put or call options.
I believe a good strategy for gold and silver traders, at present, is buying well-out-of-the-money options. Why? Well-out-of-the-money options cost less but still can provide profit potential due to the much bigger daily price movements. For example, on Monday, a trader could have bought a put option on December silver futures that was “out of the money” by $3.00 (considered well out of the money at that time) and one day later be “in the money” and making profits.
