Using Options to Hedge a Falling Dollar

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Like other Exchange Traded Funds (ETFs) GLD, the popular gold-based ETF, trades like a stock. But, rather than a group of stocks the shares represent the value of gold. In fact the entire fund is worth $17 billion worth of gold bullion. Each share of the ETF represents a small portion of that total value.

[VIDEO] Using Options to Hedge a Falling Dollar

On June 3rd 2008 options first became available on GLD providing us with some distinct investing advantages. One advantage of ETFs is that they provide access to assets that might otherwise be unavailable to options investors. In this case, GLD provides access to the gold and commodities market without having to become a futures trader. GLD will rise and fall with the price of gold just like the futures or spot contracts would.

Accessing the gold market through an ETF means that you do not have to become a futures trader to take advantage of the growth opportunities or hedging benefits of the metal commodities market. In particular, Gold is attractive because it is a hedge against a falling U.S. Dollar. This has become particularly meaningful of late as a weakening dollar has been disrupting the capital markets.

To take advantage of this trend you could buy gold or, even more conveniently, the gold ETF which will rise in price as the USD falls.  GLD can be used in a covered calls strategy as well if you want to smooth out some of the volatility inherent in the commodity’s price.  Or, you could speculate directly in the options themselves rather than buying the ETF outright. Like most long options plays the advantage is leverage and with liquid options contracts a profitable trade could provide some great upside.

In the video, I will look at a chart of GLD from a technical perspective and from the context of a weak U.S. Dollar. I will also walk you through a sample option’s chain sheet. There is nothing quite like gold and this ETF is a great way to diversify into another asset class with great growth prospects.