Despite last week’s rousing recovery in equities, demand for gold has yet to abate. Such conviction from gold buyers is about as bullish as it gets for the gold price, the SPDR Gold Trust (ETF) (GLD) … and gold mining stocks for that matter.
The recent market turmoil lit a fire under the “flight-to-safety” trade driving investors into GLD, U.S. Treasury Bonds and a slew of other assets with a safety label beckoning to investors.
And if the recent behavior is any indication, it appears the safety complex is ready for another leg higher.
The beauty of the recent action in the gold ETF is it has allowed for a modest bout of profit taking, shaking out anxious owners in the process, while setting up a low-risk entry for traders itching to jump aboard the gold train.
As illustrated below, the choppy back-and-forth in GLD of late has developed a clean-looking pennant formation. The tightening price movement reveals a volatility compression squeezing prices into an ever-narrowing range.
Such a compression pattern amid an uptrend typically portends higher prices once resolution finally strikes.
And today, strike it did. GLD was up 1.5% right off the bat today on account of an overnight rally in gold futures. Traders eyeing this as the beginning of the next upthrust in the gold price should be considering bullish trades here.
Go for the GLD With an Option Trade
Bull call spreads present a low-risk, not to mention cheap, avenue for betting with GLD bulls here. By using May options, we can structure a trade with plenty of time for the gold ETF to make the requisite move.
Buy the May $119/$124 call spread for $1.65. The call vertical spread consists of buying to open the May $119 call while selling to open the May $124 call. The initial debit of $1.65 represents the max loss and will be forfeited if gold prices stumble and GLD sits below $119 at expiration.
The max gain is limited to the distance between strikes minus the net debit, or $3.35, and will be captured if GLD can rise above $124 by expiration.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.
