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A strategy idea for options trading investors.
While Europe leaders play “Extend and Pretend”, and Washington plays political “Chicken” the equity markets, based upon our indicators, remain remarkably sanguine. Trading volume usually declines in the summer, but since more earnings reports are due to be released this week volume as measured by the important E-mini S&P 500 Futures contracts, has remained very active.
SPDR Gold ETF (NYSE: GLD) 155.20.
We previously offered suggestions for GLD in both Digest Issue 16 and Digest Issue 17 and we are returning once again since it has broken out above the May 2 high at 153.61 and looks to be trending higher.
The current Historical Volatility is 12.25, with an Implied Volatility Index Mean of 16.41, up from 13.90 last week. The recent IV low was on July 1 at 13.60 and the high was last November 9 at 22.75. The IV/HV ratio is 1.34 and the put-call ratio is bearish at 1.3, however higher put volumes will be seen in GLD since this ETF is used for hedging other gold positions. Friday’s options volume was 399,321 contracts compared to the 5-day average of 383,130 contracts.
As a trend continuation trade, consider this bull call spread.
| B/S | Qty | O/C | U Sym | Exp | Strike | P/C | Price | IV |
| Buy | 1 | O | GLD | SEP | 157 | Call | 3.73 | 17.54 |
| Sell | 1 | O | GLD | SEP | 162 | Call | 2.12 | 18.04 |
| Dr | 1.61 |
Since gold has a tendency to pull back and retest breakouts we suggest setting the SU (stop/unwind) at a close below 150.
The suggestion above is based upon last Friday’s closing prices using the mid-price between the bid and ask. On Monday, the option prices will be somewhat different due to the time decay over the weekend and any price change.
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