Nerves are frayed on Wall Street as the threat of a U.S. debt default looms ever larger, and many investors are choosing to wait for calmer waters. But not all of them.

With no clear resolution on U.S. debt ceiling talks, those in the market are sticking to an extremely short time horizon.

Michael Matousek, senior trader at San Antonio-based U.S. Global Investors, is still looking for opportunities. One of the ones he's seen is the trading action in gold stocks.

Given the uncertainty, he said the firm's strategy now was as much about protecting capital as generating returns, which means a lot more hedging against falls in the market.

Gold has surpassed $1,600 an ounce, soaring to an all-time record as investors flee to safety. Gold mining firms have not seen that kind of action.

Over the past few weeks gold stocks have been more correlated with the S&P than the price of gold, resulting in days when gold rises but miners fall, something that's happening more and more, he said. That's a trend we've focused on that I don't think the broader market has noticed.

The 50-day correlation between the S&P 500 and the Amex Gold/Silver Index <.XAU> was strong in the middle of July as gold and gold stocks moved in opposite directions. That has reversed recently, to the benefit of Matousek, a trend he hopes continues.

The dislocation was a chance to scoop up what he sees as undervalued stocks that later rebounded. In July the S&P has struggled, losing 1.7 percent, but the Gold Index is up 3 percent and gold is up 8.2 percent.

He's been more active in hedging, however. To maximize our returns we're doing more options and derivative trading relative to even three weeks ago, he said.

U.S. Global Investors, which manages $3 billion, is hedging using the options market, selling call options -- an option to buy a stock at a given price by a certain date -- against a position they own. This caps an investor's potential gains, but also offsets the cost.

He has also been using so-called risk reversal trades, which aim to create a synthetic long position -- buying out-of-the-money calls, with the cost partially offset by selling out-of-the-money puts, instead of buying shares.

The outcome of the talks in Washington is difficult to predict, and traders have generally tried to limit losses, with many saying they had reduced the size of their bets.

We're taking much lighter position sizes than normal, which has become standard operating procedure until the debt ceiling issue is resolved, said Tom Donino, co-head of trading at First New York Securities. We're doing much less trading in general, but when we do, we trade around the most active names.

Daily volume has only topped 8.47 billion -- 2010's daily average -- once since June 24. The light action has been a boon for short-term traders as volatility rises.

Steve Place, a co-founder of options analytics firm, InvestingWithOptions in Mobile, Alabama, said he has been bullish on volatility. He's been using put ratio spreads--selling puts in the money and using that to offset the cost of buying out-of-the-money puts, which are bets on more volatility.

The additional volatility -- the CBOE Volatility Index recently hit its highest level since March -- has complicated Matousek's strategy.

Anemic volume had made it difficult to speculate in exploratory gold names, which are smaller and tend to be more volatile. You can't flip in and out of the small names the way you can the bigger, highly-liquid stocks, said Matousek, who couldn't name his positions due to compliance reasons.

Dollar stocks tend to be a lot more volatile than the bigger names, but since it's harder to get into one with less liquidity you miss those movements, he said.

Matousek wouldn't disclose how successful the strategies have been, citing compliance issues, but the U.S. Global Investors World Precious Minerals fund is up 5 percent so far this month.

(Additional reporting by Angela Moon; Editing by Andrew Hay)