GDP Sinks, Gold Soars, and Opportunity Knocks

by Tyler Craig | January 30, 2013 11:09 am

This morning’s disappointing GDP number is making some waves in the precious metal space. The Commerce Department reported the U.S. economy contracted 0.1 percent from October through December 2012. The report fell far short of market expectations for 1 percent growth and signaled the first economic contraction since the second quarter of 2009.

On the heels of the release, gold futures surged a quick 1% from $1,665 to $1,682 before falling back to $1,678. The ever-popular SPDR Gold Shares (NYSE:GLD[1]) followed in kind, gapping higher by 1% to kick off today’s trading session.

Let’s survey the price action of GLD in recent months to see if today’s renewed strength merits an options trade or two.

GLD chart 300x226 GDP Sinks, Gold Soars, and Opportunity Knocks
Click to Enlarge

Since peaking at $174.07 in mid-September, GLD has been in a steady decline. With money plowing into the equities market amid increasing investor confidence, it seems poor ol’ gold has been left out in the cold. While it’s made a few attempts to reverse into an uptrend over the past four months, each one failed. Tack on the fact that the yellow metal is still firmly below a declining 50-day moving average, and it becomes clear that gold has much work to do before aggressive bullish trades become appealing.

And yet — GLD has stabilized somewhat over the past month. It’s formed a couple higher pivot lows on the daily chart, and the 20-day moving average has flattened out a touch. Perhaps today’s weak economic release was just the spark needed to awaken GLD from its slumber and kick off a new uptrend.

In light of these opposing viewpoints, let’s consider both a bullish and bearish trade idea.

Bear

If you think today’s gold pop is likely to fizzle as the broader downtrend continues to exert its influence, consider using this rally as an opportunity to sell out-of-the-money March 167-172 call spreads. The trade can be entered by selling the March 167 call and buying the March 172 call for a $0.75 credit. The max reward is $0.75 and the max risk is $4.25. Consider it a bet that GLD will fail to rise to $167 by March expiration.

Bull

If you think GLD is unlikely to take out its support level in the $159 zone, consider selling out-of-the-money March 158-153 put spreads. The trade can be entered by selling the March 158 put and buying the March 153 put for a $0.63 credit. The max reward is $0.63 and max risk is $4.37. Consider this position a bet that GLD will fail to fall below $158 by March expiration.

There are two benefits to using out-of-the-money March options.  First, by using out-of-the-money strikes we’re creating positions that profit even if GLD trades sideways over the next month.  The suggested short put and call spreads are higher-probability plays than buying straight calls or puts.  Second, since March options only have about six weeks left before expiration, they will experience a higher rate of time decay than April or May options.  This allows us to rack up profits quicker.

One potential X-factor for the movement in gold today is the upcoming FOMC announcement at 2:15 p.m. EST. If the Fed renews its commitment to quantitative easing and other stimulus measures, inflation fears could very well drive GLD even higher in the short term.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

Endnotes:
  1. GLD: http://markets.financialcontent.com/investplace./quote?Symbol=GLD

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