GLD: There’s Gold in Them Thar Options!

There is little argument that gold is a globally sought-after precious metal. Some buy it for safety while others use it to represent successes. For stock market investment purposes, the easiest way to trade gold is to use SPDR Gold Trust (ETF) (GLD). The GLD tracks gold prices and is liquid making it easy to trade at the retail level.

On the one hand, we know that gold is a precious metal and that it is becoming exceedingly more difficult to mine. On the other hand, we see tumbling gold prices in recent years. GLD stock lost more than 40% of its value in the last five years, falling from $185 to $102 per share.

In these two opposing notions, I see the opportunity for a long gold trade with good prospects for profit.

For guidance on what levels to buy, I turn to the options markets and examine the current expectations for GLD prices. Current setups suggest a scenario where GLD needs to go higher in the near-term. So I want to capture the upside potential to $106. Instead of buying the GLD outright, I prefer buying calls in the GLD for the short- or mid-term.

The options market offers hundreds of lower-risk strategies than to risk $103 per share of GLD. Here are two bullish examples:

  • 2 steps of GLD upside potential
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    I can buy calls in the Nov. 27 expiration at the $103 strike price. If GLD rises in the next 10 days, I stand to gain with the appreciation of the $103 call premium. The cost of the call is 68 cents per contract, which is my maximum potential loss.
  • I can buy the monthly Dec $103 call instead which gives me more time to profit from my thesis. For extra time I have to pay a bigger premium therefore risking more money. The $103 Dec 2105 strike costs $1.68 per contract thereby risking more money than with the November contract. The benefit of the higher premium is that I buy myself 20 extra days to be correct.

Although I can’t be certain that this is the bottom in gold prices, I am certain that I stand a decent chance at profiting from this trade. Since I am buying calls at the money, I can consider this almost a coin flip. Usually I am not a fan of coin flip trades, but I feel that the options open interest gives me an edge over the face value of the trade viability.

Proven support likely to hold
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There are other strategies that can further reduce my outlaid risk. For example, I can add another layer of bullishness that actually puts credits into my account. I can sell cautious credit put spreads to help finance this long call trade. These will add additional potential losses if GLD prices continue falling precipitously.

Levels for these credit put spreads would be well below the five-year bounce level shown in the accompanying chart.

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

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