Use GLD and SLV Options to Beat Inflation

Sometimes no, if you are trading, the word should be always you need to trade
perception and not reality. It is time to hook onto the current trade on
inflation it picked up this week after Federal Reserve Chairman Ben Bernanke
said he is not raising interest rates anytime soon. The Reality – the thought
there could be real inflation in the U.S. is laughable. Perception – traders
are increasingly fearful of Fed created inflation. Therefore, you should think
precious metals, and options trading on ETFs on gold and silver, such as the
SPDR Gold Trust (NYSE: GLD ) and the iShares Silver Trust (NYSE: SLV ). Thats my
recommendation. First, lets consider some background on reality versus
perception. First, the reality. Inflation is the upward movement in prices
created by too much money available to buy too few goods. Historically, when the
Fed lowers interest rates, capital is cheap so people buy too many homes and
stuff, and businesses build too many factories. This time, consumers are broke
and not spending, and business is awash with capacity and is not building. Wait
a second, you say, what about the $4 a gallon and rising I'm paying at the
pump? Energy is a very small portion of GDP so it has little impact on the core
rate of inflation. Now, let's get into the perception. Many believe low
interest rates MUST mean extra liquidity created by the Fed MUST mean inflation
is coming. These folks are very loud, indeed they are screaming – and that is
creating fear among traders and many foreign investors. Forget reality and trade
the perception. What trades are best for this next leg of the inflation trade?
Precious Metals. Everyone says that precious metals are too hot and are in a
bubble. Nope. They are a key long-side play on the inflation trade. They may
have run too far too fast but that does not mean the run will end. It may pause,
but it should continue. And in addition to inflation fears, silver is actually
used in electronics and medical treatments. First, do not play the commodities
themselves, play the exchange-traded funds, such as the SPDR Gold Trust and the
iShares Silver Trust . Look at two different trades depending on your appetite
for risk. Straight Calls: The metals may be taking a pause SLV sure will as it
nears $50 so either look at late summer out-of-the-money calls or buy Weeklies
to minimize your exposure to a correction. A Buy-Write: Think about buying the
GLD ETF and immediately writing covered calls, either to average down the price
you paid or to generate some cash. You can do this every week if you want to,
these ETFs have Weekly options. Always sell out-of-the-money calls. There are
many other plays against inflation but why stray from great charts and the
current attitude towards precious metals. And think about the price of gold and
silver is something nasty happens in Saudi Arabia? Or if Egypt's new leaders
make too much noise about Israel? Traders will switch from inflation to
geopolitical fears, and you win that way as well.