After making a low of $100.23 on Dec. 17, shares of the SPDR Gold Trust ETF (GLD) rallied 22% to trade at a new recent high of $122.37 on March 4. Since then, GLD has pulled back and is now sitting squarely at a critical support level at $117.50.
Given the magnitude of the recent rally, I look for GLD to consolidate around these levels, especially with the opposing European Central Bank and Bank of Japan policy decisions, along with the likelihood that the Federal Reserve will be on hold.
While the ECB came out and fired the monetary bazooka last week, the Bank Of Japan disappointed some this morning by keeping interest rates unchanged (although still negative).
Most economists feel the Federal Reserve will likely keep rates on hold following their two-day meeting starting today. The Fed Funds rate points to a zero probability of a hike at this meeting. With major central banks’ policy decisions now known, the impetus for a further move in gold over the short-term appears to be muted.
Money managers are holding the longest net position in gold in over a year. CFTC data also shows the largest open interest in gold futures and options since July 2013. Both of these are usually reliable contrary indicators, signifying that most buyers are already positioned.
The price action from March 4 is indicative of a top, with GLD rallying sharply to make a new high at $122.37 only to reverse and close lower and also near the lows of day. Certainly a pause following the near-parabolic recent rise in GLD would be warranted.
There is further downside support for GLD at the $114 level, and I think gold will consolidate in this area over the next month, trading between the recent highs of $122 and the secondary support level of $114. To position for this range-bound viewpoint, I favor using an iron condor strategy — selling both an out-of-the-money call spread and an out-of-the-money put spread.
GLD Iron Condor Spread
Specifically, I would look to sell the GLD April $123 calls and buy the GLD April $125 calls for a 34-cent net credit while simultaneously selling the GLD April $113 puts and buying the GLD April $111 puts for a 38-cent net credit. The total net credit on the trade would be 72 cents. These are the regular April monthly options that expire April 15.
The maximum profit on the trade is $72 per spread, with a maximum risk of $128 per spread. Return on risk is 56.25%. The short call strike is positioned above the resistance level at $122.37 while the short put strike is below the $114 support level.
I would close out the entire position on a meaningful break of either support or resistance, while hoping to let both spreads expire worthless and keep the initial premium if GLD remains well-behaved.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
