Slap an Iron Condor on Uncertain GLD

With the holidays upon us, one gift that people might be giving and receiving is gold. Most of you probably aren’t thinking about your gift as an investment, but if you are a trader, you might. Here is a trade idea based on the uncertainly of gold — via the SPDR Gold Shares (GLD) ETF — that will profit if the price of gold does not change much over the next month.

SPDR Gold Shares (GLD — $114.82): Iron Condor

The trade: Sell the GLD Jan 120/122 Call Credit Spread (selling the Jan 120 call and buying the Jan 122 call) and sell the Jan 108/110 Put Credit Spread (selling the Jan 110 put and buying the Jan 108 put) for 60 cents or better.

The strategy: The maximum potential profit for this trade is 60 cents if GLD is trading between $110 and $120 at January expiration. In that event, all of the options would expire worthless. The maximum loss is $1.40 ($2 – $0.60) if GLD is trading below $108 or above $122 at January expiration. Breakeven is $109.40 and $120.60 at expiration based on a credit of $0.60.

The rationale: There had been a lot of talk about what would happen to gold prices once the FOMC shared its plans. Now that the Fed has announced its “tapering” plans, a general sense of relief seems to have hit the market. The Fed is going to cut its monthly asset purchases, which should reduce the demand for gold, and on Thursday, gold indeed dropped to its lowest level in about five months. Does this mean that gold prices will tank even further? No one can be certain, but it really depends on how inflation is kept in check. Hedge funds and other speculators increased their net-long position in the precious metal by about 25% just more than a week ago. It appears the bears and bulls are playing a ferocious game of tug-of-war.

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Taking a look at the GLD chart, the ETF has formed an area of resistance right below the $120 area. On Thursday, the ETF gapped down to a previous low (pivot level) it hit at the end of June. Many times, a gap down into a potential support area is followed by a reversal.

However, being that this trade is not solely based on the technicals, there is a distinct possibility that gold prices could drop lower.

The $110 area is an area that GLD has not reached below since April 2010. That trend needs to continue for this trade idea to work.

Potential support and resistance and an uncertain future for gold prices make this trade idea look awfully precious.

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here.

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