Gold is percolating once more thanks to the stock swoon. There’s nothing like a crash to spur traders to take a renewed look at the shiny stuff, and since gold futures came within a pebble toss of tagging the all important $1,000 mark, we’ve seen a respectable 7% rally.
SPDR Gold Trust ETF (GLD) — the de facto proxy for gold in ETF world — developed a nice little rounded bottom complete with a pair of breakouts to kick off the new year.
With the short-term trend now pointing higher, a retest of the descending 200-day moving average is inevitable. Might this be the start of a bigger bottoming process for the ailing yellow metal?
Perhaps.
Skeptics believe we’ve seen this movie before: GLD has had over a dozen recovery attempts since descending in 2012. All held promise and all ultimately died a fiery death, delivering anguish to gold bugs of all stripes. But, hey, maybe this time is different.
One development bolstering the bulls is the RSI divergence that cropped up during GLD’s last drop. This momentum signal suggests the downtrend is slowing. If the bulls want to push it, now’s the time. If the GLD ETF can breach the 200-day moving average watch for a retest of prior resistance near $113.
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Whether this bottoming attempt for GLD succeeds is somewhat irrelevant.
See, we can structure an options trade to score big profits even if the rally in gold prices only extends just a bit further before the buzzkill bears kick in the doors, kill the music and otherwise wreck our party.
The GLD ETF Trade
To profit from a potential return to the $113 level consider buying the March $107/$113 call spread for $2.05. The max risk is limited to the initial $2.05 debit and will be lost if GLD sits below $107 at April expiration.
The max reward, while limited, is substantial. The profit maxes out at $3.95 which is the distance between the $107 and $113 strikes minus the net debit.
Rather than riding to expiration consider bailing as soon as GLD touches the higher strike of $113. This ensures you pocket the gains while the gettin’ is good, just in case the recovery attempt ultimately fails.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
