The U.S Governments’ fiscal year concludes at the end of the third quarter. Expect more volatility as we wait to see how traders bet on whether or not Congress can pass appropriations bills to keep the U.S. Government open for business. The Government, in the past, shut down most recently in 2018. Prior to that? 2013, 1995 and 1994. Gold prices rallied during the shutdowns in the past. But what if there is no shutdown?

Gold has been on the move since we had a breakup! (breakout to the upside) from the 5-month rangebound trade, ($3200-$3500) basis the December gold contract. Since September 2^nd, gold has rallied in 3 weeks over $300 per troy oz. to $3810.00, if your crystal ball had you long Gold and you want to protect your current gains, what follows are a few Ideas you can implement using futures options. Consult with your Cannon Trading broker (800 454 9572 or 310 859 9572) for clarity.

Calculate the size you will be hedging: Calculate the number of contracts as (Portfolio Value / Gold Price × 100 oz)). For a $760,000 long position at $3,800/oz, use ~2 contracts.

Strategy 1: Protective Put (Straightforward Downside Insurance)

Buy put options on gold futures to gain if gold prices fall, offsetting losses in your long position. This is ideal for strong bullish views but with short-term downside concerns.

Steps to Implement:

1. Assess Exposure: Determine your long position’s value.
2. Choose Strike and Expiration: Out-of-the-money (OTM) puts (e.g., 5-10% below current price, like $3,600 strike at $3,800 spot) for cheaper premiums; at-the-money (ATM) for fuller protection. Use 1-3 month expirations for flexibility.
3. Execute: Buy puts via a futures-approved broker (e.g., Cannon Trading). Premium: ~1-5% of notional (e.g., $500-$2,000 per contract at 20% implied vol).

Example:

• Gold at $3,800; buy $3,600 put expiring in 2 months for $150/oz premium ($15,000/contract).
• If gold drops to $3,400: Put worth ~$200/oz (intrinsic value), hedging $20,000 loss per contract in your long position.
• If gold rises: Lose only the premium, but keep gains.

Pros: Retains unlimited upside; simple. Cons: Premium decays over time (theta); costly in low-vol environments.

Strategy 2: Collar (Low-Cost or Zero-Cost Hedge)

Buy a protective put and sell an OTM call to finance it. This caps upside but provides free/cheap downside protection—suitable for neutral to mildly bullish outlooks in volatile markets.

Steps to Implement:

1. Buy Put: OTM (e.g., $3,600 strike).
2. Sell Call: OTM above spot (e.g., $4,000 strike) with same expiration.
3. Match Sizing: Same number of contracts as your exposure.
4. Execute: Net premium near zero if call income matches put cost (adjust strikes for balance).

Example:

• Buy $3,600 put ($150/oz premium); sell $4,000 call (collect $150/oz).
• Net cost: $0.
• Protection below $3,600; upside capped at $4,000 (may need to close if called away) Pros: Minimizes upfront cost; effective in sideways markets. Cons:                                   Limits gains; potential assignment on calls.

Strategy 3: Bear Put Spread (Defined-Risk, Lower-Cost Protection)

Buy a higher-strike put and sell a lower-strike put for partial hedge at reduced cost. Best for moderate downside expectations without full insurance.

Steps to Implement:

1. Select Strikes: Buy ATM/OTM put (e.g., $3,800); sell further OTM (e.g., $3,400).
2. Expiration: 1-6 months.
3. Contracts: Match exposure.
4. Execute: Net debit = Long put cost minus short put premium (e.g., $200/oz debit = $20,000/contract).

Example:

• Buy $3,800 put ($250/oz); sell $3,400 put (collect $50/oz). Net: $200/oz.
• Max hedge benefit: $400/oz spread minus debit ($200/oz profit if gold < $3,400).
• Limited protection to spread width.
• Pros: Cheaper than naked puts; caps max loss. Cons: No protection below short strike; less flexible.