Dig for Golden Profits With GDX Puts

Since plunging to new multiyear lows at $1,179, gold has been on the mend, rebounding as much as 14.5%. And yet, its attempts at resurrection are being stymied by the massive overhead resistance zone that has thus far acted as an impenetrable ceiling.

Although gold’s current wrestle with $1,350 was easy to predict, it has been impressive that the yellow metal has held up so well. It seems to be absorbing any and all supply coming to market without crashing back down.

This afternoon’s Fed announcement is sure to make some waves in the currency and interest-rate markets — both of which will undoubtedly push gold one way or the other. Because Bernanke’s statement has the possibility of lighting a fire under gold, it might not be a bad idea to consider a bullish trade or two just in case.

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Traders have a variety of ETFs at their disposal for playing gold, including the SPDR Gold Shares (GLD) and the Market Vectors Gold Miners ETF (GDX).

Interestingly, after a prolonged spell of underperforming gold, gold miners have finally started outperforming (green arrow). What’s more, GDX has vaulted back above its 50-day moving average for the first time since October of last year. With GLD still struggling to climb above its 50-day moving average, GDX appears the better bet at this stage.

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Since reclaiming this key moving average, the consolidation in GDX has taken on the form of a bull flag. If it can break above resistance (upper trendline around $27.50), a renewed advance might commence.

With implied volatility in GDX options near the upper end of its 52-week range (not shown), option-selling plays still offer some attractive premiums.

If you’re looking for a position that provides a decent margin of error, consider selling the Sep 24 puts for around 65 cents, but remember to wait for the breakout before pulling the trigger.

Your max reward is limited to the initial credit received and will be captured provided GDX sits above $24 at expiration. To minimize the risk, consider exiting if GDX falls beneath the strike price at $24.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2013/07/dig-for-golden-profits-with-gdx-puts/.

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