As many investors are likely aware, the SPDR Gold Trust ETF (GLD) have found a following in 2016 as most other asset classes toil with bear markets.
But given the nature of this overly aggressive “risk-off” trade, the only thing worth its weight in gold right now is a limited risk bear put spread in the GLD exchange-traded fund. Let me explain.
Back in the first half of January, I wrote a bullish article on Barrick Gold (ABX) after reviewing GLD and other miner’s prospects.
A couple weeks after our analysis, profits began to quickly mount with definite help from GLD, as the metal is now up a fairly precious 16% year-to-date.
Gold bugs came barreling out of the woodwork sounding alarm bells, pointing to breakouts and pontificating on a new world order where gold and GLD are king once more, or something along those lines. And investors have certainly bought into the story.
But don’t get too dreamy-eyed about the GLD ETF right now, as it’s time to take profits. Not only that, GLD is an extreme situation where shorter-term traders might consider fading the massive price run using a bearish vertical. It’s taken a lot for GLD to rise from the dead and put together its rather over-the-top, glitzy and gap-riddled bid.
Japan’s negative interest rate policy, our own Federal Reserve now seemingly entertaining the same prescription, plunging oil prices (hitting 13-year lows this week) and continued weak data out of China have all provided plenty of support in sending GLD rocketing higher.
What’s more, sheer panic on the part of investors (as witnessed by a percolating and fearful VIX index) has been instrumental in getting the GLD ETF to shine relative to virtually all other asset classes.
GLD ETF Daily Chart
Click to Enlarge
While GLD bugs have broken a couple downtrend lines, it’s taken very extreme action to get there and on a market narrative that’s highly likely to unwind itself as calmer heads prevail.
As it stands, multiple price gaps punctuated by what appears to be an exhaustion gap on massive volume and a shooting star reversal candlestick, suggest a pullback over the coming couple weeks.
Further, an overbought RSI and resistance from a projected broadening or inverse triangle formation support a bearish thesis, or at a minimum, price action prone to profit-taking.
Trading the GLD ETF
Checking the GLD options board, the weekly March 4 $118/$115 put spread for up to $1.35 is priced attractively given our view of lower prices to come.
This bear vertical reduces the long premium of the $118 put by about 40%. Given elevated volatility levels, this also allows the trader to offset time decay and volatility risks at decent prices.
With GLD finishing Friday at $118.36, the trader needs roughly a decline of 1.3% to breakeven.
And were GLD to fill its exhaustion gap down near $113.60 at expiration, which is three weeks out, the trader would capture $2.65, or nearly 200% below $115. That’s about 3% below current levels.
That’s not too much to require of GLD given the past few weeks. And as the trader is fully protected should gold bugs manage to become even more buggy, this vertical is worth its weight in gold.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
