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How to play the Fed decision using options on gold
Gold is trading at all-time highs due to a combination of inflation concerns, geopolitical risks, and expectations around monetary policy. With the upcoming Federal Reserve announcement Wednesday at 2 p.m. ET, markets are speculating on a possible half-point cut. Given the Fed’s softer stance on the economy — partly due to the cooling labor market — a larger rate cut could provide additional fuel for gold’s rally. We’ll review a way to play it with options. Historically, gold tends to benefit from dovish monetary policies, especially when they signal prolonged low interest rates, which reduce the opportunity cost of holding non-yielding assets like gold. Gold has maintained its bullish momentum, trading near $2,600, and appears to be breaking into new all-time highs. With strong momentum continuing to drive prices upward, gold could potentially target $2,750 or even higher following a bigger half-point cut, which would boost its appeal further as a safe-haven asset. Looking at the chart, gold has consistently made higher highs and higher lows, a sign of strong upward momentum. Momentum remains firmly positive, signaling continued buying pressure. Gold’s appeal has been strengthened by an uncertain economic outlook. Concerns about inflation, global tensions, and the potential for slower growth have prompted investors to seek safety. Furthermore, in a low-interest-rate environment, the allure of yield-less assets like gold rises, especially since other assets tied to interest rates (e.g., bonds) offer reduced real returns when inflationary concerns persist. Gold is also supported by central bank demand. Central banks around the world continue to accumulate gold to diversify away from fiat currencies, adding another layer of demand for the precious metal. The trade To express a bullish to neutral view on gold going into the Fed announcement, consider selling a SPDR Gold Shares (GLD) Nov 1 $237.5/232.5 Put Vertical @ $2.02 Credit. This entails: • Selling the Nov 1, 237.5 Put at $4.65. • Buying the Nov 1, 232.5 Put at $2.63. View this link in OptionsPlay with updated pricing: This put credit spread allows you to profit if gold (GLD) stays above $237.50 by expiration. The maximum potential reward is $202 per contract, with a maximum risk of $298, yielding a 67.8% return on risk. The breakeven point on this trade is $235.48, meaning you would only start to incur losses if GLD closes below that level. This trade offers a solid risk/reward profile for investors who are moderately bullish on gold but want to limit risk going into a potentially volatile event like the Fed meeting. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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