Tuesday’s surprise market rally brought good tidings and cheer to beleaguered bulls who were in desperate need of a holiday pick-me-up. Unfortunately, the majority of the rise took place overnight. This means that unless you jumped in sometime during Monday’s bloodbath, you likely missed the move.

Along with the rise in equities, money also found its way into gold as SPDR Gold Trust (NYSE:GLD) rose 1.36% on the day. Despite the recent three-day run in GLD, it remains in a downtrend below its 20-, 50- and 200-day moving averages.  Consequently, this may be a low-risk opportunity to initiate bearish-type trades.

One play worth consideration is the selling the GLD January 163-168 bear-call spread.  To enter the position, you would “sell to open” the $163 call while “buying to open” the $168 call for a net credit around 80 cents. The exact prices you pay/collect for each option don’t matter (although prices that work are collecting $1.30 for the $163 and paying 50 cents for the $168), just as long as you enter the trade in the 80-cent (credit) area.

This bearish vertical spread offers a high-probability, limited-risk avenue for betting GLD will fail to rise above $163 by January expiration.  The maximum reward is limited to the initial 80 cents received at trade inception, which will be captured as long as GLD remains below $163.  The max risk is limited to the distance between strikes ($168 – $163 = $5) minus the net credit ($5 – 80 cents = $4.20), and will be incurred if GLD rises above $168 by January expiration.

The rally in GLD may continue for a few more days before a new wave of selling takes hold.  As such, I would wait for a break of the prior day’s low before pulling the trigger on the bear call spread.

Source:  MachTrader

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