Play Market Uncertainty With a SPDR Gold Trust Credit Spread

by John Kmiecik | September 23, 2013 9:08 am

It looks like the market’s heading for some choppy waters.

With the constant threat of the Fed slowing down purchasing and with the government on the brink of a shutdown once again, what is a trader to do? Here is a trade idea to turn all that uncertainty in your favor.

SPDR Gold Trust (GLD[1]): Call Credit Spread

The trade:  Sell the October 133/135 Call Credit Spread (selling the October 133 call and buying the October 135 call) for $0.30 or better.

The strategy: The maximum potential profit for this trade is $0.30 if GLD is trading below $133 at October expiration as both call options would expire worthless. The maximum loss is $1.70 (2 – .30) if GLD is trading above $135 at October expiration. Breakeven is $133.30 at expiration based on a credit of $0.30.

The rationale: Gold has been on quite the volatile ride the last several weeks. With the threat of the Federal Reserve slowing down their bond purchases, GLD has been dropping since the beginning of September. When the Fed said that they will not decrease purchasing securities because the economy doesn’t warrant it, GLD moved much higher on Wednesday.

But where does gold go from here? St. Louis Fed President James Bullard said that the “taper could arrive as early as October.” If that is true, GLD may continue to drop.

Click to Enlarge

Taking a look at the chart, this credit spread trade is just a step above prior pivots in September. This trade is counting on resistance to keep the stock from moving higher and threatening profits on this spread. Another positive for this trade is that GLD closed below its 50-day simple moving average, which has acted as support and resistance in the past for this ETF. We can’t be sure what the Fed will do, but gold looks to continue to be weak.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. If you are interested in a free trial of my LIVE options trading room visit:[2]

  1. GLD:

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