Gold prices took yet another tumble this week. The poor yellow metal is floundering near the $1,100 level and has yet to mount any kind of sustainable comeback.
But therein lies opportunity.
Option traders can bank some coin off of continued choppy action in the SPDR Gold Shares (GLD) with the simple trade outlined below. Before we delve into the details, let’s take a fresh look at the price chart of everyone’s favorite gold ETF.
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Structurally speaking, GLD remains a hot mess. The weekly downtrend remains well intact with the bears aggressively warding off any and all attempts to upend their dominance.
One of the simplest ways to illustrate the vicious downtrend that has defined precious metals of late is the declining 200-day moving average. Despite the occasional attempt at rallying above this downward slanting ceiling GLD has been powerless to dethrone its bearish overlords.
With this week’s gold price drop carrying GLD back below all its moving averages once again, now is as good a time as any to jump into the fray.
GLD Bear Calls for the Win
Option traders can use short call verticals to capitalize on continued gold weakness. By selling out-of-the-money call options we’re essentially betting won’t rise much in the coming month. If so, the call options will end up expiring worthless, allowing us to pocket the credit we receive at trade entry.
Sell the GLD Nov $112/$116 call spread for 50 cents. The max reward is limited to the initial 50-cent credit and will be captured if GLD prices sit below $112 at expiration which is altogether likely. The max risk is limited to the distance between strikes minus the net credit, or $3.50, and will be lost if GLD should somehow rise above $116 by expiration.
To limit the loss, consider bailing if GLD rises to the short call strike at $112.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
