The specter of higher interest rates spooked investors Friday. The usual cohort of rate-sensitive assets (bonds, REITS, utilities, staples) suffered tremendously during the terror.
Commodities were also one of the hardest hit areas, with gold and silver tumbling all day long.
Higher rates dampen the appeal of non-yielding assets like the yellow metal and its high-beta cousin.
Friday’s bloodbath also ushered in the long-awaited return of volatility. As is usually the case after a long absence, the sudden drop was as surprising as it was large. Despite the broad swath of destruction wrought on charts across the land, opportunity lurks in a few select areas.
Take the commodity space for instance. Its overall trends remain higher, despite last week’s rout. And therein lies opportunity.
Behold, here are three commodity trades in exchange-traded funds to profit from rate fears.
Commodity Trades for Interest Rate Fears: SPDR Gold Trust (ETF) (GLD)
Of today’s trio, gold had arguably the most muted reaction to Friday’s fear-fest. The SPDR Gold Trust (ETF) (NYSEARCA:GLD) ended the day down a scant 0.7%. Yawn.
With today’s slight down-gap, GLD is now down four days in a row. With its longer-term trend still pointing higher, this dip looks as buy-able as the last handful.
Further bolstering the bullish argument here is the lack of heavy volume accompanying last week’s drop. I just don’t see any type of mass exodus out of gold here.
If you’re willing to bet that GLD remains above $122 for the next month, sell the Oct $122/$118 bull put spread for 51 cents.
Commodity Trades for Interest Rate Fears: iShares Silver Trust (ETF) (SLV)
The selling in silver ran hot on Friday. By day’s end the iShares Silver Trust (ETF) (NYSEARCA:SLV) was off 2.7%. Compared to gold’s snooze, the swoon in SLV was a veritable rout. And yet, SLV’s weekly uptrend remains intact, making this a lower-risk area to initiate bullish plays.
We also saw a nice pop in implied volatility for SLV options, making short premium strategies a touch more compelling than they’ve been in recent weeks. If you think SLV can remain above $17, or if you’re a willing buyer in that area, sell the Oct $17 puts for 21 cents.
Provided the put option remains out of the money, you’ll capture the 21 cents come expiration. If SLV ends up falling beneath $17, you’ll be obligated to buy 100 shares at a cost basis of $16.79 ($17 – 21 cents).
Commodity Trades for Interest Rate Fears: iShares MSCI Emerging Markets Indx (ETF) (EEM)
Rounding out our hat trick of commodity plays is a naked put play on the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM).
Due to heavy exposure to commodities, the emerging markets ETF took a nose-dive into the weekend. By the time the closing bell rang, EEM was down 3.4% on heavy volume.
The selling pressure persisted over the weekend, delivering a sizable down-gap this morning. Fortunately, the low open is being bought up as I type.
Like its predecessors in this list, EEM boasts a weekly uptrend, making the current retracement an alluring dip buy. The cheaper price tag and recent implied volatility spike are making naked puts an interesting trade here.
If you’re comfortable betting EEM remains above $34.50 for the next month, sell the Oct $34.50 put for around 46 cents.
At the time of this writing Tyler Craig owned bullish positions on GLD, SLV and EEM.