Recently I located an unusual stock trading strategy that involves “trading pairs”. Forex users trade pairs when it comes to currencies, but stock investors can do the same and the following strategy produced a 43% return last week by trading the OIL/GOLD pair.

“Since 1983 it has taken an average of 15.7 barrels of oil to buy one ounce of gold”.

Now you are probably thinking, “Big deal, how can I use that information to make money?”

Here lies the beauty and the simplicity of this strategy. First you need two pieces of information, the current cost of gold and the current cost of oil. You can get that information at the following websites:

Gold: http://goldprice.org
Oil: http://oil-price.net

On September 1st, 2009 Oil was 73.02 per barrel. Gold was 955.20 per ounce. Now you take the price of gold and divide it by the price of oil, 955.20 / 73.02 = 13.08.

Now that we know that it takes 13.08 barrels to buy one ounce we can see we are below the 15.7 average. This number of 13.08 is telling us that Gold has to rise and/or Oil has to fall in order to go from 13.08 to 15.70.

Since we now know which direction Gold and Oil should move, we buy a Call on Gold (because we know it’s going up) and buy a Put on Oil (since it is going down). To buy these options we need stock symbols to work with so we use GLD for Gold and USO for Oil.

Since you don’t know how long it will take the pair to go from 13.08 to 15.70 I suggest you buy options that expire in six to 12 months.

On September 1st, USO was around $36 a share so I bought UBOPK for $480 a contract. The option expires in April of 2010 and gives me the right to sell USO for $37 a share.

I also bought the Call (GLDAP) on GLD for $490 a contract. The option expires in Jan of 2010 and allows me to buy GLD at $94 a share (GLD was currently around $93 a share).
Now I am covered. When Gold rises and Oil falls I make money. Well I didn’t have to wait long.

One week later GLD went from $93 to $97 and USO went from $36 to $35.

My options which originally cost $970 ($480 + $490) were now worth $1,390. That’s a 43% return (UBOPK is now at $580 per contract and GLDAP is at $810 per contract).

In one week the gold/oil ratio went from 13.08 to 14.64, moving closer to the 15.70 target.

So the next time you find this gold/oil ratio much higher or lower than 15.70, use this strategy to make yourself a big return.