Buy put at
deal of momentum coming with the second reversal back. The Gold price action, which Figure 7.3 illustrates with a six-line price break chart, has witnessed several of these flip-flops, demonstrating an option trading opportunity.
The general strategy is as follows: Once a reversal column appears, place a one-month-away option, playing a reversal again back to the origin of the move. A flip-flop will be powerful enough to continue with consecutive highs on a reversal back up, or consecutive lows on a reversal down.
On November 19, 2007, gold closed at 781.75 and generated a down reversal column. The trader would play a flip-flop by putting on a gold call at the projected reversal point of 833.59, which was the previous high. Remember that a six-line reversal had occurred down; an immediate six-line reversal up would take the price to the high that had occurred right before the reversal. In this case, the strike price one or two months out would be 835. The flip-flop occurred on December 28, 2008 at 840.5 and proceeded to move in twelve consecutive highs to a high of 929.40 on January 30, 2009. The central idea is to use the projected six-price reversal point as an entry location.
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