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SPDR Gold Trust (ETF) (GLD): Gold Is Regaining Its Luster

After underperforming stocks by a wide margin over the past three years, SPDR Gold Trust (ETF) (GLD) finally broke out of the downtrend and is poised for further upside from here.

GLD
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After finally breaking out above the $114 level in early February, shares of GLD rallied strongly up to the $122 area before consolidating over the past two weeks. The gold ETF closed at $120.03, virtually at the critical $120 resistance level. It also held the 20-day moving average of $118.03.

A meaningful move higher should propel gold toward the next resistance level at $125, which also equates to the 200-day MA.

With additional rate hikes by the Fed no longer a foregone conclusion, the U.S. dollar is showing some weakness recently, trading at an eight month low. Fed Watch — which uses the Fed funds futures markets to gauge the likelihood of a Federal Reserve rate hike — now places an increase by December at 51%. Only a week ago, that likelihood was nearly 60%.

U.S. dollar
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With gold inversely related to the strength of the dollar, any further dollar weakness should provide a decent tailwind for further appreciation in GLD. Gold also has the unique trait of being both a commodity and a currency.

The options market has somewhat discounted a further leg up in gold prices, with GLD options implied volatility at only 38%. This level of complacency could lead to some short covering if GLD does ultimately and convincingly breakout above the crucial $120 level.

It also makes long option spreads comparatively more attractive.

gldIV

How to Trade GLD Here

To position for the breakout, I am using a call calendar spread. Specifically, I am buying the GLD May $122 calls (expire May 20) and selling the GLD April $122 calls (expire this Friday, April 15) for a $1.55 net debit. The initial spread is positioned bullishly at 16 deltas long, while also benefiting from time decay.

Ideally, GLD moves toward the $122 level by this Friday. If the ETF closes below $122 on April expiration, I would look to sell additional short-term options against my May $122 GLD calls to further reduce my initial cost, while maintaining a bullish posture.

If GLD happens to rally above the $122 level, I would close out the position for a gain.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/gold-gld-may-regaining-luster/.

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