A relief rally is underway in beaten-down gold. The yellow metal, long since left for dead, is trying to end the year with at least a smidgen of dignity. Despite a four-day pop for the SPDR Gold Trust (ETF) (NYSEARCA:GLD), GLD still is limping into year-end 17% off its mid-year highs.
It’s not the finish gold bugs were hoping for given the rousing rally that greeted them in the first half of 2016.
Gold stocks are also getting in on the action. The Market Vectors Gold Miners ETF (NYSEARCA:GDX) is up 9% this week. The Direxion Daily Junior Gold Miners Bull 3x Shares (NYSEARCA:JNUG) are up 17% today alone!
Despite the valiant rebound attempt, GLD remains firmly in bear territory. Look no further than the trio of moving averages looming overhead for proof. The 20-, 50- and 200-day moving averages are all pointing lower, and the longer ones are stacked atop the shorter ones — in true bearish form.
Price advances are always suspect in such an environment.
On the bright side, the current ramp is creating a lower-risk entry point to initiate bearish plays if you think the downtrend will persist.
A Golden Trade Idea
While the rebound may continue for a few days yet, its eventual failure is all but assured. Rather than go for the jugular with a straight put option purchase, consider embracing the odds with a bear call spread.
If you’re comfortable betting GLD remains below the 50-day moving average (currently perched at $115), you could sell the Feb $115/$118 call spread for 33 cents.
The short vertical spread consists of selling to open the Feb $115 call while buying to open the Feb $118 call. The initial credit of 33 cents represents the max reward and will be captured if the gold fund remains below $115 for the next six weeks.
The max risk is limited to the distance between strikes minus the net credit, or $2.67, and will be forfeited if GLD rallies above $118 by expiration.
To limit the loss, consider exiting if prices rise above the $115 zone.
As of this writing, Tyler Craig held option positions on GDX.