As per our prediction in our previous write ups, post Fed gold has gained a little from the lows of 1046.23 levels to the current 1081.65 levels.

Gold for February delivery on the Comex division of the New York Mercantile Exchange shed 30 cents, or 0.03%, to trade at $1,073.80 a troy ounce during European morning hours. A day earlier, gold dipped $6.50, or 0.6%, snapping a two-day rally.

If you think the prices of this precious metal are to spike up further, then cover your underlying exposures with collars strategy.

Gold futures has dipped to 5-1/2 years' lows very recently amid growing expectations that the Federal Reserve will hold off on hiking interest rates until 2016 but it did not happen as expected.

When above fundamental reasoning bothers your trade sentiments, this strategy is for those who have this commodity exposure at present who are concerned about a correction and wish to hedge the long spot currency position.

Well the hedger takes following positions 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.

Maximum return = Strike price of call - Currency spot price - net premium paid or Strike price of call - Currency spot price + net credit received on short side.