Despite the magnitude of the late September sell-off, the big picture in gold is beginning to look appealing again for bullish plays.

The SPDR Gold Trust (NYSE:GLD) formed a higher swing low to keep the uptrend on the weekly chart intact. The $155 level has also established itself as key support going forward.  Provided GLD can remain above this line in the sand, the path of least resistance is likely higher.

Lest we paint too bullish a scenario, one mustn’t forget there is plenty of overhead supply to work through before GLD sees new highs. There are still a number of trapped bulls who are no doubt willing to sell into any type of rally back to the $170-$175 level.

The bull put spread is one strategy which makes sense in this scenario.  Rather than requiring GLD to rise rapidly, it merely requires the precious metal doesn’t drop too far in value from current levels.

Suppose we sold the GLD Nov 154-149 put spread. Entering the position consists of “Selling to Open” the GLD Nov 154 Put (which would give you a credit of $2, as of this writing) while simultaneously “Buying to Open” the 149 Put (which would cost you $1.20 at this time).

The max reward is limited to the net credit received at the inception of the trade ($0.80 as of Tuesday morning, or $2 – $1.20). The max risk is limited to the distance between the strike prices ($5) minus the net credit ($0.80), or $4.20.

Provided GLD remains above $154 by November expiration, the put spread will reach its max profit potential.

Since a break of $155 would signal a reversal in the weekly trend, traders may consider exiting the position to minimize the loss if this price level is breached.

Source:  MachTrader

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