Question

To keep things simple, assume that all prices are continuous and that any size order may be filled if an action (trigger) price is hit.

a) The current price per ounce for a gold futures contract is $400. You believe if the price moves up by $10 that this contract would be fundamentally overpriced. What order would you place with your broker now to try to trade on this belief?

Answer 1

Place a "Sell Limit" order at $410 per ounce to sell the gold futures contract if its price increases by $10, aligning with the belief that it would be fundamentally overpriced at that level.

Step-by-step explanation:

To act on the belief that the gold futures contract would be overpriced if the price increases by $10, you should place a "Sell Limit" order at the trigger price of $410 per ounce. This order type allows you to sell the contract when the market price reaches or exceeds your specified trigger price.

By setting a "Sell Limit" order at $410, you are essentially instructing your broker to sell the gold futures contract if and when the market price hits that level. This order helps you capitalize on your belief that the contract would be fundamentally overpriced at that point. It's a proactive approach, automating the selling process when the desired price is reached, even if you're not actively monitoring the market.

This strategy allows you to potentially benefit from your market analysis and implement a predefined exit plan based on your price expectation.