On the back of mixed bag of US economic reports investors have been skeptic on Fed's rate decision. Yellow metal far month contracts for December delivery on the Comex division of the NYME edged down 10 cents, or 0.01%, to trade at $1,166.10 a troy ounce during early European trading sessions.

Gold rallied to a four-month peak of $1,191.70 last week amid speculation the U.S. central bank will not raise rates until sometime next year, if you think the prices of this precious metal are to spike up further, then cover your underlying exposures with collars strategy.

Gold futures rallied to 7 week highs today amid growing expectations whether the Federal Reserve will hold off on hiking interest rates until 2016 or any fresh indications on when it may start to hike interest rates. We have to wait until tomorrow to get the confirmation on this.

The strategy is for those risky traders who have this commodity exposure at present and are concerned about a correction and wish to hedge the long spot commodity position. The hedger takes following positions to constructs this strategy:

Write an OTM call option + hold an ITM put option (near month Call & mid month put). Writing OTM calls may likely to fetch certain returns since any abrupt slumps in near future may be taken care by this instrument.

This helps as a means to hedge a long position in the underlying outrights by holding longs on protective put.

Thereby, any declines in this commodity would be taken care by ITM put options since the holder of the put option will have right to sell at predetermined strike price at expiry in case of American style options.

The options will have the same expiration date and similar deltas. In commodities trading it is used for hedging which consists of selling a call and buying a put option.

This strategy protects against unfavorable, downward price movements but limits profits that can be made from favorable upward price movements.