After underperforming stocks by a wide margin over the past three years, SPDR Gold Trust (ETF) (GLD) finally broke out of the downtrend and is poised for further upside from here.
Click to Enlarge After finally breaking out above the $114 level in early February, shares of GLD rallied strongly up to the $122 area before consolidating over the past two weeks. The gold ETF closed at $120.03, virtually at the critical $120 resistance level. It also held the 20-day moving average of $118.03.
A meaningful move higher should propel gold toward the next resistance level at $125, which also equates to the 200-day MA.
With additional rate hikes by the Fed no longer a foregone conclusion, the U.S. dollar is showing some weakness recently, trading at an eight month low. Fed Watch — which uses the Fed funds futures markets to gauge the likelihood of a Federal Reserve rate hike — now places an increase by December at 51%. Only a week ago, that likelihood was nearly 60%.
Click to Enlarge With gold inversely related to the strength of the dollar, any further dollar weakness should provide a decent tailwind for further appreciation in GLD. Gold also has the unique trait of being both a commodity and a currency.
The options market has somewhat discounted a further leg up in gold prices, with GLD options implied volatility at only 38%. This level of complacency could lead to some short covering if GLD does ultimately and convincingly breakout above the crucial $120 level.
It also makes long option spreads comparatively more attractive.
How to Trade GLD Here
To position for the breakout, I am using a call calendar spread. Specifically, I am buying the GLD May $122 calls (expire May 20) and selling the GLD April $122 calls (expire this Friday, April 15) for a $1.55 net debit. The initial spread is positioned bullishly at 16 deltas long, while also benefiting from time decay.
Ideally, GLD moves toward the $122 level by this Friday. If the ETF closes below $122 on April expiration, I would look to sell additional short-term options against my May $122 GLD calls to further reduce my initial cost, while maintaining a bullish posture.
If GLD happens to rally above the $122 level, I would close out the position for a gain.
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.
