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SPDR Gold Trust (ETF) – Is GLD Poised to Break Out or Fake Out?

This golden strategy will work for both bulls and bears alike

The big question now for the gold bugs is whether the strong rally seen over the past two weeks in the gold price will continue or stall.

Shares of the SPDR Gold Trust ETF (NYSEARCA:GLD) have been on a major bull run since the beginning of October, rising 6.73% since making a low on Oct. 1 at $106.63. Thursday’s closing price in GLD of $113.81 marks the fund’s highest close since June 19. It also was the first time that GLD closed above the critical 200-day moving average ($112.86) since briefly piercing that level on May 18.

GLD ETF price chart
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The last time GLD was meaningfully above the 200-day MA was Feb. 5, which also coincided with the breakdown of the island top formed at recent highs.

While the bulls can point to the fact that GLD broke the downtrend line and made a higher high on 10/9, bears can cling to the notion that GLD still hasn’t broken through major resistance at the 114.50 level. On a 9 day RSI basis, GLD is overbought, with a reading of 76.31. Prior readings above the 70 level this year marked significant local highs in the gold price.

Fundamentally, the decision by the Federal Reserve to keep rates on hold for longer than anticipated staunched the rally in the U.S. dollar, a decided benefit for GLD. So with both the bulls and bears having a valid argument at these levels, I thought both a bullish credit spread and a bearish credit spread trade idea would be warranted.

  • Bullish Strategy: Sell GLD Nov $108 puts / Buy GLD Nov $105 puts for a 33-cent net credit
  • Bearish Strategy: Sell GLD Nov $119 calls / Buy GLD Nov $122 calls for a 38-cent net credit

Both spreads are defined-risk, with the max loss being 3 points less the initial net credit received. The bull put spread is 5.11% out-of-the money, while the bear call spread is 4.56% out of the money.

Both trades are structured with the short option at major price gaps on the GLD chart, providing a further layer of support at those levels. The bull put spread has a return on risk of 12.36%, while the bear call spread has a return on risk of 14.5%. Interesting to note that unlike stocks, GLD and other commodity-based exchange-traded funds usually have a reverse skew, with out-of-the money calls carrying a higher level of implied volatility versus similar out-of-the money puts.

GLD chart 2
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For both spreads, I would use a meaningful move past the short strike to close out at least a portion of the position, especially given that the short strikes were structured at technical support levels. Otherwise, I would let the position expire worthless and look to keep the initial premium received.

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

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