GLD: Try the Golden Knife Catch

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The slow-motion crash in gold kicked it up a notch in recent days.

Blame the acceleration on the bulls’ inability to defend the pivotal support zone near $1,140. Once the levy gave way, the selling really began in earnest.

The speed of the decline coupled with the soaring volume has more than a few onlookers wondering if we’re seeing sufficient signs of capitulation to indicate a gold rebound is in the offing.

And I suspect there are also more than a few knife catchers wondering if the time is at hand to try a bullish play in the SPDR Gold Shares (GLD).

While I think we may yet see some additional pain in the gold ETF before it snaps back, it’s certainly getting tempting to throw on a contrarian play here.

GLD chart 1
Click to Enlarge
Source: OptionsAnalytix

Given the difficulty of nailing a price low in real time, I like the idea of using a higher-probability option strategy that offers a decent margin of error. That way, if GLD falls further before finally popping back we won’t get shaken out prematurely.

Selling out-of-the-money bull put spreads might be just the ticket.

On top of the wide profit range, short put verticals also take advantage of the high level of implied volatility currently seen in GLD options. With the uptick in demand for protection during the recent price swoon, GLD implied vol has risen to a four-month high. Higher premiums translates into more profit potential for option sellers willing to step up and take some risk at current levels.

In selecting which strike price to sell traders might consider using puts that sit below a key support level. A bird’s eye view of gold reveals $1,000 as the next major potential floor. Long-term watchers of the yellow metal will recall $1,000 acted as major resistance in 2008.

It’s as logical a place as any for would-be buyers to congregate.

Gold chart 1
Click to Enlarge
Source: OptionsAnalytix

Since the $100 zone for the gold ETF corresponds with $1000 for the actual commodity consider selling a put spread with a strike price below $100.

Sell the Aug $99/$96 put spread for 30 cents or better. The max reward is limited to the initial 30 cents and will be captured provided GLD sits above $99 at expiration.

The risk is limited to the distance between strikes minus the net credit, or $2.70, and will be lost if GLD falls below $96.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/gld-etf-golden-knife-catch/.

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