You hear it all the time. The experts say things like “everyone needs gold in their portfolio.” All I know is that gold is rare and getting more difficult to extract, which in my book makes it a sure bet over the long term. But as good as the gold fundamentals are, I have to recognize that gold is also a safety trade. So when markets are rallying, SPDR Gold Trust (ETF) (NYSEARCA:GLD) loses its bid. When markets are under pressure, money runs into the GLD for safety.
GLD is the most convenient way to trade gold’s price in the options market. I usually have great success trading it when opinions become extreme. I like to go long it when every experts says they hate it.
Unfortunately, Wall Street’s opinion of GLD is not unilateral these days, so I don’t see a flagrant extreme that signals a directional short-term trade. So I will trade the range at hand using the options market. The trick is to find levels that are not likely to happen in either direction and sell risk there and let time do the work.
The Long Side: Sell the GLD June $116/$115 credit put spread. This bullish trade has an 85% theoretical chance of yielding 19% on risk as long as GLD stays above my sold strike.
To balance my risk I will sell opposite risk, so that I am hedged in my position … but I will delay entry into this so see how the next few days price action will transpire.
GLD is under pressure here largely because markets are ripping higher from France election results and earnings. I don’t want to sell the upside risk too early and at a discount then get caught fighting a souring credit call spread through June.
The Bearish Side: Sell the GLD June $125/$126 credit call spread. Here I also have an 85% theoretical chance to win if GLD will stay below my sold strike and yield 10% on risk.
By selling both spreads, I would be in a sold iron condor with +/-4 % buffer from current price. Also, by selling both sides I reduce my dollars at risk thereby raising my potential yield over 35% on money risked.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
