A strategy idea for options trading investors.

The recent dollar slump helped propel gold to yet another new high for the year. It seems the yellow metal is the gift that keeps on giving. The recent rise in gold has been accompanied by an equally impressive rise in implied volatility for options on the SPDR Gold ETF (NYSE: GLD).  As shown below the IV (gold line) has popped around three points or 21% from 14 to 17. Those who took the opportunity to scoop up long volatility plays last week are currently being rewarded for their efforts.

One of the long volatility plays suggested in the July 6 post Three Ways to Play Cheap GLD Options was buying an GLD Aug 149 Straddle for $6. Remember a straddle consists of buying an at-the-money call option and an at-the-money put option. Due to the $5 rise in GLD and the lift in implied volatility, the straddle has increased in value to more than $8. With a 33% unrealized profit, straddle owners may be wondering how to manage the position at this stage in the game. Before divulging my thoughts on trade management, a brief review of straddle dynamics is in order.

Though a straddle starts out as a delta neutral, bi-directional trade, it becomes increasingly directional as the stock rises or falls. In the case of our Aug 149 straddle, the underlying has risen in value by $5 thereby placing the long 149 call deep in-the-money and the long 149 put far out-of-the-money. The call option has a delta of +75 while the put option has a delta of -25. This once delta neutral position has become a +50 delta position. As such, the best case scenario is to see a continued ramp in GLD’s price.

At this point in the trade I would manage the straddle the same way I would manage a long call option. If GLD continues to rise I suggest staying the course. If, on the other hand, GLD begins to drop in price I would simply exit the position to lock-in profits.

Source:  IVolatility.com

At the time of this writing Tyler Craig had no positions on GLD.