Gold prices are in desperate need of some direction. The yellow metal has spent the last six weeks in dithering mode.
The price of Wall Street’s top gold ETF — the SPDR Gold Trust (ETF) (NYSEARCA:GLD) – has spent its days clinging to the $115 zone. Any and all attempts to break free have been stymied in short order.
Not surprisingly, gold’s directionless jaunt has resulted in a flattening of the 20- and 50-day moving averages. Though both, along with the 200-day moving average, have a slight downward tilt.
What should perhaps excite potential GLD traders is the current relationship between the coveted metal and the S&P 500. As shown in the chart below, the correlation between both stands near zero at -0.15.
In other words, they are virtually uncorrelated. Gold is moving to the beat of its own drum these days, which means when we place trades on GLD it will diversify our portfolio. That way not all our positions will be rising or falling together.
In case you were wondering, gold stocks boast a similar relationship with the broader stock market.
Play the Range with GLD Call Spreads
While the indecisive action in GLD is likely frustrating directional traders, option sellers have a number of ways to profit from the chop — like selling out-of-the-money credit spreads, for instance.
If you’re willing to bet GLD remains below the $120 level for the next 44 days, consider selling the Jun $120/$123 call spread for 35 cents. The options mart is pricing in an 80% probability GLD won’t rise above $120, so the spread offers a high probability of success.
The maximum reward is limited to the initial 35 cents, which may not sound like a lot. But compared to the potential risk, the reward represents a potential return of 13%.
Speaking of risk, the maximum you can lose is $2.65 and will be forfeited if GLD rises above $123 by expiration. Of course, you can drastically limit the loss by exiting if the gold ETF rises above the short call strike price at $120.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.